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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to __________________.
COMMISSION FILE NUMBER 1-9802
SYMBOL TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 11-2308681
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
One Symbol Plaza
Holtsville, New York 11742-1300
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (631) 738-2400
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [x] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
YES [x] NO [ ]
The number of shares outstanding of the registrant's classes of common stock,
as of May 4, 2005, was as follows:
Class Number of Shares
----- ----------------
Common Stock, par value $0.01 242,773,976
DOCUMENTS INCORPORATED BY REFERENCE: NONE.
================================================================================
SYMBOL TECHNOLOGIES, INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED
March 31, 2005
TABLE OF CONTENTS
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements.............................. 3
Condensed Consolidated Balance Sheets at March 31, 2005 (Unaudited) and
December 31, 2004....................................................... 3
Condensed Consolidated Statements of Income for the Three Months Ended
March 31, 2005 and 2004 (Unaudited)...................................... 4
Condensed Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2005 and 2004 (Unaudited)................................ 5
Notes to Condensed Consolidated Financial Statements (Unaudited)............ 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................................... 24
Item 3. Quantitative and Qualitative Disclosures About Market Risk............... 37
Item 4. Controls and Procedures.................................................. 37
PART II - OTHER INFORMATION
Item 1. Legal Proceedings........................................................ 37
Item 6. Exhibits................................................................. 37
Signatures........................................................................... 38
2
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SYMBOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except per share data)
MARCH 31, DECEMBER 31,
2005 2004
----------- -----------
(UNAUDITED)
ASSETS
Cash and cash equivalents ......................................... $ 218,218 $ 217,641
Accounts receivable, less allowance for doubtful accounts of
$7,725 and $9,385, respectively .................................. 111,143 113,658
Inventories, net .................................................. 172,360 207,338
Deferred income taxes ............................................. 180,394 179,844
Other current assets .............................................. 27,040 24,286
----------- -----------
Total current assets ............................................ 709,155 742,767
Property, plant and equipment, net ................................ 249,522 241,508
Deferred income taxes ............................................. 214,373 236,725
Investment in marketable securities ............................... 75,212 81,230
Goodwill .......................................................... 496,025 497,283
Intangible assets, net ............................................ 43,889 45,404
Restricted cash ................................................... 51,636 51,370
Other assets ...................................................... 31,456 34,082
----------- -----------
Total assets .................................................... $ 1,871,268 $ 1,930,369
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses ............................. $ 399,849 $ 414,915
Short term credit facility ........................................ 50,000 100,000
Current portion of long-term debt ................................. 29,183 18,072
Deferred revenue .................................................. 52,057 43,692
Income taxes payable .............................................. 8,965 20,132
Accrued restructuring expenses .................................... 7,325 9,971
----------- -----------
Total current liabilities ....................................... 547,379 606,782
Long-term debt, less current maturities ........................... 162,709 176,087
Deferred revenue .................................................. 28,046 25,122
Other liabilities ................................................. 33,342 49,859
Contingencies
STOCKHOLDERS' EQUITY:
Preferred stock, par value $1.00; authorized 10,000 shares, none
issued or outstanding ............................................ -- --
Series A Junior Participating preferred stock, par value $1.00;
authorized 500 shares, none issued or outstanding ................ -- --
Common stock, par value $0.01; authorized 600,000 shares; issued
272,657 shares and 272,069 shares, respectively .................. 2,727 2,721
Additional paid-in capital ........................................ 1,491,037 1,484,093
Accumulated other comprehensive earnings, net ..................... 10,976 13,699
Deferred compensation ............................................. (14,365) (15,642)
Accumulated deficit ............................................... (92,824) (112,565)
----------- -----------
1,397,551 1,372,306
LESS:
Treasury stock, at cost 29,634 shares and 29,796 shares,
respectively ..................................................... (297,759) (299,787)
----------- -----------
Total stockholders' equity ...................................... 1,099,792 1,072,519
----------- -----------
Total liabilities and stockholders' equity .................... $ 1,871,268 $ 1,930,369
=========== ===========
See notes to condensed consolidated financial statements.
3
SYMBOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share data)
(Unaudited)
FOR THE
THREE MONTHS ENDED
MARCH 31,
--------------------------
2005 2004
--------- ---------
REVENUE:
Product ...................................................... $ 384,242 $ 348,239
Services ..................................................... 73,245 71,412
--------- ---------
457,487 419,651
COST OF REVENUE:
Product cost of revenue ...................................... 197,866 170,739
Services cost of revenue ..................................... 54,060 53,984
--------- ---------
251,926 224,723
--------- ---------
Gross profit ................................................. 205,561 194,928
--------- ---------
OPERATING EXPENSES:
Engineering .................................................. 42,351 41,559
Selling, general and administrative (including $1,003 and $0
of restricted stock compensation expense, respectively) ...... 138,887 121,680
Stock based compensation expense (1) ......................... -- 2,234
--------- ---------
181,238 165,473
Earnings from operations ..................................... 24,323 29,455
Other (expense) income, net .................................. (6,568) 1,006
--------- ---------
Earnings before income taxes ................................. 17,755 30,461
(Benefit from) provision for income taxes . .................. (4,413) 23,633
--------- ---------
NET EARNINGS ................................................. $ 22,168 $ 6,828
========= =========
EARNINGS PER SHARE:
Basic and diluted ............................................ $ 0.09 $ 0.03
========= =========
CASH DIVIDENDS DECLARED PER COMMON SHARE ..................... $ 0.01 $ 0.01
========= =========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING:
Basic ........................................................ 247,404 231,685
Diluted ...................................................... 251,286 239,401
(1) If we had allocated stock-based compensation expense shown above to each of
the respective line items, the allocation would have been as follows:
FOR THE
THREE MONTHS ENDED
MARCH 31,
-----------------------
2005 2004
-------- --------
Product cost of revenue ........................... $ -- $ 710
Services cost of revenue .......................... -- 335
Engineering ....................................... -- 140
Selling, general and administrative ............... -- 1,049
-------- --------
$ -- $ 2,234
======== ========
See notes to condensed consolidated financial statements.
4
SYMBOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
FOR THE
THREE MONTHS ENDED
MARCH 31,
--------------------------
2005 2004
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings ............................................................. $ 22,168 $ 6,828
ADJUSTMENTS TO RECONCILE NET EARNINGS TO NET CASH PROVIDED BY OPERATING
ACTIVITIES:
Depreciation and amortization of property, plant and equipment ........... 12,496 14,428
Other amortization ....................................................... 4,756 3,598
(Benefit from) provision for losses on accounts receivable ............... (69) 542
Provision for inventory write-down ....................................... 1,740 1,183
Deferred income tax (benefit)/provision .................................. (4,413) 23,633
Non-cash stock-based compensation expense ................................ 1,003 2,234
Non-cash restructuring, asset impairment and other charges ............... 535 --
Loss on disposal of property, plant and equipment and other assets ....... 404 109
Unrealized holding loss on marketable securities ......................... 5,741 --
Decrease in fair value of derivative ..................................... (3,371) --
Tax benefit on exercise of stock options ................................. 1,947 --
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Accounts receivable .................................................... 792 27,645
Inventories ............................................................ 33,238 199
Other assets ........................................................... 5,284 7,933
Accounts payable and accrued expenses .................................. (2,979) (47,876)
Accrued restructuring expenses ......................................... (2,918) (1,744)
Other liabilities and deferred revenue ................................. (3,702) 2,077
--------- ---------
Net cash provided by operating activities ............................. 72,652 40,789
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in other companies, net of cash acquired ...................... -- (4,050)
Purchases of property, plant and equipment ............................... (21,077) (11,171)
Investments in intangible and other assets ............................... (1,727) --
--------- ---------
Net cash used in investing activities .................................. (22,804) (15,221)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable and long-term debt and other financing
activities .............................................................. (50,267) (80)
Proceeds from long-term debt ............................................. -- 13,825
Proceeds from exercise of stock options and warrants ..................... 5,313 10,293
Purchase of treasury shares .............................................. -- (19,956)
--------- ---------
Net cash (used in) provided by financing activities .................... (44,954) 4,082
Effects of exchange rate changes on cash and cash equivalents ............ (4,317) (634)
--------- ---------
Net increase in cash and cash equivalents ................................ 577 29,016
Cash and cash equivalents, beginning of period ........................... 217,641 150,017
--------- ---------
Cash and cash equivalents, end of period .............................. $ 218,218 $ 179,033
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
CASH PAID (RECEIVED) DURING THE PERIOD FOR:
Interest ................................................................. $ 2,749 $ 3,551
Income taxes ............................................................. $ (639) $ 3,578
See notes to condensed consolidated financial statements.
5
SYMBOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS AS OF MARCH 31, 2005 AND
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Overview
Symbol Technologies, Inc., The Enterprise Mobility Company(TM), and
subsidiaries deliver products and solutions that capture, move and manage
information in real time to and from the point of business activity. Symbol
enterprise mobility solutions integrate advanced data capture products, radio
frequency identification ("RFID") technology, mobile computing platforms,
wireless infrastructure, mobility software and services programs under the
Symbol Enterprise Mobility Services brand.
The Condensed Consolidated Financial Statements include the accounts of
Symbol Technologies, Inc. and its majority-owned and controlled subsidiaries.
References herein to "Symbol" or "we" or "our" or "us" or the "Company" refer to
Symbol Technologies, Inc. and subsidiaries unless the context specifically
requires otherwise. The Condensed Consolidated Financial Statements have been
prepared by us, without audit, pursuant to the rules and regulations of the
United States Securities and Exchange Commission (the "Commission" or "SEC").
In our opinion, the Condensed Consolidated Financial Statements include all
necessary adjustments (consisting of normal recurring accruals) and present
fairly our financial position as of March 31, 2005, and the results of our
operations and cash flows for the three months ended March 31, 2005 and 2004, in
accordance with the instructions to Form 10-Q of the Commission and in
accordance with accounting principles generally accepted in the United States of
America applicable to interim financial information. The results of operations
for the three months ended March 31, 2005 are not necessarily indicative of the
results to be expected for the full year. For further information, refer to the
consolidated financial statements and footnotes thereto included in our Annual
Report on Form 10-K for the year ended December 31, 2004.
Reclassifications
Certain reclassifications were made to previously disclosed amounts to
conform to current presentations.
Stock-Based Compensation
We account for our employee stock option plans under the intrinsic value
method in accordance with the provisions of Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees" and related
interpretations. Under APB Opinion No. 25, generally no compensation expense is
recorded when the terms of the award are fixed and the exercise price of the
employee stock option equals or exceeds the fair value of the underlying stock
on the date of the grant. Except in connection with certain restricted stock
awards (see note 5a), no stock based compensation expense has been recognized
for the fixed portion of our plans; however, during the first quarter 2004,
certain stock-based compensation expenses have been recognized through our
operating results related to options of certain current and former associates.
We have adopted the disclosure-only requirements of Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," which allows entities to continue to apply the provisions of APB
Opinion No. 25 for transactions with employees and provide pro forma net
earnings and pro forma earnings per share disclosures for employee stock grants
made as if the fair value based method of accounting in SFAS No. 123 had been
applied to these transactions.
6
The following table illustrates the effect on net earnings and earnings per
share if we had applied the fair value recognition provisions of SFAS No. 123 to
stock-based compensation:
THREE MONTHS ENDED
MARCH 31,
------------------------
2005 2004
-------- --------
Net earnings - as reported ............................. $ 22,168 $ 6,828
Stock-based compensation expense included in
reported net earnings, net of related tax effects .... 617 1,374
Less total stock-based compensation expense
determined under the fair value based method for
all awards, net of related tax effects .............. (4,944) (4,900)
-------- --------
Pro forma net earnings ................................. $ 17,841 $ 3,302
======== ========
Basic and diluted net earnings per share:
As reported .......................................... $ 0.09 $ 0.03
Pro forma ............................................ $ 0.07 $ 0.01
The weighted average fair value of options granted during the three months
ended March 31, 2005 and 2004 was $9.07 and $8.70 per option, respectively. In
determining the fair value of such options granted during these periods for
purposes of calculating the pro forma results disclosed above for the three
months ended March 31, we used the Black-Scholes option pricing model and
assumed the following: a risk free interest rate of 2.8 percent for 2005 and
2004; an expected option life of 4.5 years for 2005 and 4.7 years for 2004; an
expected volatility of 61 percent for 2005 and 2004; and a dividend yield of
0.14 percent for 2005 and 0.16 percent for 2004.
Recently Issued Accounting Pronouncements
On December 16, 2004, the Financial Accounting Standards Board (FASB) issued
FASB Statement No. 123 (revised 2004), Share-Based Payment ("Statement 123(R)"),
which is a revision of FASB Statement No. 123, Accounting for Stock-Based
Compensation. Statement 123(R) supersedes APB Opinion No. 25, Accounting for
Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash
Flows. Generally, the approach in Statement 123(R) is similar to the approach
described in Statement 123. However, Statement 123(R) requires all share-based
payments to employees, including grants of employee stock options, to be
recognized in the income statement based on their fair values.
In April 2005, the SEC extended the adoption date for Statement 123(R) until
January 1, 2006. Early adoption will be permitted in periods in which financial
statements have not yet been issued. We expect to adopt Statement 123(R), based
upon the extended adoption date, on January 1, 2006 using the modified
prospective method.
As permitted by Statement 123, we currently account for share-based payments
to employees using APB Opinion 25's intrinsic value method and, as such,
generally recognize no compensation cost for employee stock options.
Accordingly, the adoption of Statement 123(R)'s fair value method will have a
significant impact on our results of operations. The impact of adoption of
Statement 123(R) cannot be predicted at this time because it will depend on
levels of share-based payments granted in the future and assumptions used in
such periods to calculate the fair value of such grants. However, had we adopted
Statement 123(R) in prior periods, the impact of that standard would have
approximated the impact of Statement 123 as described in the disclosure of pro
forma net income and earnings per share shown in Stock-Based Compensation in the
footnotes to the accompanying condensed consolidated financial statements.
Statement 123(R) also requires the benefits of tax deductions in excess of
recognized compensation cost to be reported as a financing cash flow, rather
than as an operating cash flow as required under current literature. This
requirement will reduce net operating cash flows and increase net financing cash
flows in periods after adoption. While we cannot estimate what those amounts
will be in the future (because they depend on, among other things, when
employees exercise stock options), the amount of operating cash flows recognized
for such tax deductions were $1,947 and $0 for the three-months ended March 31,
2005 and 2004, respectively.
Based on the release of Statement 123(R), we plan on amending our Employee
Stock Purchase Program ("ESPP") to reduce the discount of the price of the
shares purchased by employees in the ESPP from its current discount of 15% to a
discount of 5% and we will also eliminate the look-back period currently
utilized to determine the price of the shares purchased. These changes will
allow the ESPP to continue to be non compensatory, which will result in no
compensation expense to be recorded by us in our statement of income when we
implement Statement 123(R) with respect to such plan.
Restricted Cash
7
\Restricted cash at March 31, 2005 of $51,636 represents two deposits, plus
interest. One amount of $50,622 at March 31, 2005 collateralizes a bond serving
as security for the trial court judgment against Telxon and Symbol for the Smart
Media litigation pending appeal. The cash is held in a trust and is restricted
as to withdrawal or use, and is currently invested in a short-term certificate
of deposit (See note 9c). The second amount at March 31, 2005 of $1,014 is an
interest-bearing letter of credit pledged as a supplier bond. Interest income
earned from these investments are recognized by the Company.
2. INVENTORIES
MARCH 31, DECEMBER 31,
2005 2004
-------- --------
Raw materials ............................... $ 34,028 $ 57,946
Work-in-process ............................. 31,769 26,845
Finished goods .............................. 106,563 122,547
-------- --------
$172,360 $207,338
======== ========
The amounts shown above are net of inventory reserves of $57,974 and $55,247
as of March 31, 2005 and December 31, 2004, respectively, and include inventory
accounted for as consigned of $49,183 and $61,005 as of March 31, 2005 and
December 31, 2004, respectively.
3. GOODWILL AND INTANGIBLE ASSETS
The changes in the carrying amount of goodwill for the three months ended
March 31, 2005 are as follows:
PRODUCT SERVICES TOTAL
------- -------- -----
Balance as of December 31, 2004 $ 440,399 $ 56,884 $ 497,283
Translation adjustments ....... (633) (121) (754)
Other(1) ...................... (504) -- (504)
--------- --------- ---------
Balance as of March 31, 2005 .. $ 439,262 $ 56,763 $ 496,025
========= ========= =========
(1) To adjust Matrics goodwill.
8
Other than goodwill, finite life intangible assets, all of which are subject to
amortization, consist of the following:
MARCH 31, 2005 DECEMBER 31, 2004
---------------------------- ----------------------------
ACCUMULATED ACCUMULATED
GROSS AMOUNT AMORTIZATION GROSS AMOUNT AMORTIZATION
------------ ------------ ------------ ------------
Patents, trademarks and tradenames $ 40,887 $(19,989) $ 39,160 $(18,433)
Purchased technology ............. 33,500 (15,339) 33,500 (13,988)
Other ............................ 9,100 (4,270) 9,100 (3,935)
-------- -------- -------- --------
$ 83,487 $(39,598) $ 81,760 $(36,356)
======== ======== ======== ========
The amortization expense for the three months ended March 31, 2005 and 2004
amounted to $3,242 and $2,970, respectively.
Estimated amortization expense for the above intangible assets, assuming no
additions or write-offs, for the nine months ended December 31, 2005 and for
each of the subsequent years ending December 31 is as follows:
2005 (nine months) ................................... $ 9,725
2006 ................................................. 10,441
2007 ................................................. 9,940
2008 ................................................. 8,727
2009 ................................................. 3,318
Thereafter ........................................... 1,738
-------
$43,889
=======
4. EARNINGS PER SHARE AND DIVIDENDS
Basic earnings per share are based on the weighted-average number of shares
of common stock outstanding during the period. Diluted earnings per share are
based on the weighted-average number of common and potentially dilutive common
shares (options and warrants) outstanding during the period, computed in
accordance with the treasury stock method.
The following table sets forth the computation of basic and diluted earnings
per share:
THREE MONTHS ENDED
MARCH 31,
-----------------------
2005 2004
-------- --------
Numerator:
Earnings applicable to common shares for basic
and diluted calculation ......................... $ 22,168 $ 6,828
======== ========
Denominator:
Weighted-average common shares(a) ................ 247,404 231,685
Effect of dilutive securities:
Stock options and warrants ..................... 3,882 7,716
-------- --------
Denominator for diluted calculation .............. 251,286 239,401
======== ========
(a) Included in weighted-average common shares for the three months ended
March 31, 2005 are 6,642.5 shares representing shares that would have
been issuable at March 31, 2005 under our settlement agreement of our
class action litigation (See Note 9).
Stock options and warrants outstanding for the three months ended March 31,
2005 and 2004 aggregating 16,706 and 13,026, respectively, of potentially
dilutive shares have not been included in the diluted per share calculations
since their effect would be antidilutive.
On February 28, 2005, Symbol's Board of Directors approved a $0.01 per share
semi-annual cash dividend, which amounted to $2,427 and was paid on April 8,
2005 to shareholders of record as of March 17, 2005.
5. SHAREHOLDERS' EQUITY
a. Restricted Stock
In May 2004, the Company granted 920 shares of restricted stock awards to
certain executives and non-employee directors of the Company. On the date of
grant, the market value of these restricted stock awards aggregated $13,005. The
non-employee director
9
restricted stock awards totaled 20 shares and cliff-vested at January 1, 2005.
The remaining 900 executive restricted stock awards cliff-vest in five years
provided the Company's return on net assets for four consecutive quarters does
not exceed 16.49%. If the Company's return on net assets for any four
consecutive quarters exceeds 16.49% as defined in the grant document, portions
of the executive restricted stock awards vesting will be accelerated. In
November 2004, one associate left the Company and forfeited 48 restricted shares
from the May 2004 grant. As a result of this forfeiture, in the fourth quarter
of 2004 the Company reversed the original transaction that recorded the granting
of the 48 shares and reduced the amount of compensation expense to be recognized
in future periods. Compensation expense related to these awards currently is
estimated to be $602 per quarter and could accelerate if targets are met.
In September and October 2004, the Company granted 440 shares of restricted
stock awards to certain employees associated with the Matrics, Inc. ("Matrics")
acquisition; one a service based grant (220 shares) and another a performance
accelerated grant (220 shares). On the dates of the grants, the market value of
these awards aggregated $5,553. The service based grants vest 30 percent in
eighteen months, with the remaining 70 percent vesting three years from the date
of the grant, respectively. The performance accelerated grants cliff-vest in
five years from the date of the grant. In January 2005, one associate left the
Company and forfeited 20 restricted shares from the October 2004 grant. As a
result of this forfeiture, in the first quarter of 2005 the Company reversed the
original transaction that recorded the granting of the 20 shares and reduced the
amount of compensation expense to be recognized in future periods. In April
2005, another associate left the Company and forfeited 30 restricted shares from
the September 2004 grant. As a result of this forfeiture, in the second quarter
of 2005 the Company will reverse the original transaction that recorded the
granting of the 30 shares and will reduce the amount of compensation expense to
be recognized in future periods. Compensation expense related to these awards
currently is estimated to be $388 per quarter and could accelerate if targets
are met.
b. Comprehensive Earnings
The components of comprehensive earnings are as follows:
THREE MONTHS ENDED
MARCH 31,
------------------------
2005 2004
-------- --------
Net earnings ................................... $ 22,168 $ 6,828
Other comprehensive income:
Change in unrealized gains and losses on
available-for-sale securities, net of tax .... (184) 538
Change in unrealized fair value of derivative
instruments, net of tax ...................... 1,521 (112)
Translation adjustments, net of tax ........... (4,058) (1,076)
-------- --------
Total comprehensive earnings ................... $ 19,447 $ 6,178
======== ========
6. RESTRUCTURING AND IMPAIRMENT CHARGES
a. Telxon Acquisition
We recorded certain restructuring, impairment and merger integration related
charges related to our Telxon acquisition during 2001 and 2002. Approximately $8
relating to lease obligations was included in accrued restructuring expenses as
of December 31, 2004. All remaining charges were utilized as of March 31, 2005
and there is no remaining accrual.
b. Manufacturing Transition
In 2001, we began to transition volume manufacturing away from our Bohemia,
New York facility to lower cost locations, primarily our Reynosa, Mexico
facility and Far East contract manufacturing partners. As a result of these
activities, we incurred restructuring charges during 2002 and 2001. During the
first quarter of 2004, the Company entered into a sub-lease arrangement at its
Bohemia, New York facility and recorded the anticipated sub-lease income of
approximately $2,861 as a reduction of the lease obligation cost, which had been
previously recorded in 2001. This amount was recorded as a reduction to product
cost of revenue during the first quarter of 2004. Included in accrued
restructuring expenses as of March 31, 2005 is $686 of net lease obligations
relating to these manufacturing restructuring charges.
10
LEASE OBLIGATION
COSTS
----------------
Balance at December 31, 2004 ............................... $ 623
Utilization/payments ....................................... (296)
Anticipated sub-lease income adjustment .................... 359
-----
Balance at March 31, 2005 .................................. $ 686
=====
c. Global Services Transition
In 2003, our global services organization initiated restructuring activities
which included transferring a large percentage of our repair operations to
Mexico and the Czech Republic, reorganizing our professional services group to
utilize third party service providers for lower margin activities, and
reorganizing our European management structure from a country based structure to
a regional structure. The total costs incurred in connection with this
restructuring, which related almost entirely to workforce reductions, was
approximately $2,856, of which $2,633 and $223 was recorded as a component of
cost of revenue and operating expenses, respectively, in 2003.
In 2003, we initiated additional restructuring activities in connection with
our decision to relocate additional product lines from New York to Mexico. The
costs associated with this restructuring relate to workforce reductions and
transportation costs. The total amount incurred in connection with this
restructuring activity was approximately $961, all of which was recorded as a
component of cost of revenue in 2003. These restructuring activities were
completed by June 30, 2003.
In connection with our global services transition, the Company recorded
additional provisions of $8,795 during 2004 which relate to lease obligation
costs net of sub-lease income and further work force reductions. These amounts
have been recorded as a component of service cost of revenue in the year ended
2004. An additional provision relating to work force reduction of $655 was
recorded as a component of cost of revenue in the first quarter of 2005. These
restructuring activities are expected to be completed in 2005.
d. General and Administrative Restructuring
During the second quarter of 2004, the shared services organization initiated
restructuring activities that included the consolidating and transitioning of
back office transactional activities to the Czech Republic. The costs associated
with this restructuring relate to workforce reductions. The total amount
incurred in connection with this restructuring activity was $5,025 in 2004, all
of which was recorded as a component of operating expenses. Further shared
service restructuring activities are being considered and future benefits are
not yet defined, therefore, we cannot reasonably estimate the remaining cost
expected to be incurred.
e. Other Restructurings
In 2003, we initiated additional restructuring activities to exit buildings
that were acquired with the acquisition of @POS and Covigo, Inc. The costs
associated with this restructuring relate primarily to lease obligation costs,
adjusted for anticipated sub-lease income. The total amount incurred in
connection with this restructuring activity was $958, all of which was recorded
as a component of operating expenses. These restructuring activities were
completed by September 30, 2003. During the fourth quarter of 2004, we recorded
an adjustment of $145 for @POS sub-lease assumptions that did not occur. This
was recorded as a component of operating expense.
Details of the global services transition and general and administrative
restructuring charges and remaining balances as of March 31, 2005 are as
follows:
LEASE ASSET
WORKFORCE OBLIGATION IMPAIRMENTS
REDUCTIONS COSTS AND OTHER TOTAL
---------- ----- --------- -----
Balance at December 31, 2004 ............... $ 5,397 $ 2,805 $ 1,138 $ 9,340
Provision - recorded to cost of revenues ... 655 -- -- 655
Revision of estimate - recorded to operating
expense ................................... (123) -- -- (123)
Foreign exchange effect .................... -- -- (244) (244)
Utilization/payments ....................... (2,400) (563) (26) (2,989)
------- ------- ------- -------
Balance at March 31, 2005 .................. $ 3,529 $ 2,242 $ 868 $ 6,639
======= ======= ======= =======
11
7. LONG-TERM DEBT
MARCH 31, DECEMBER 31,
2005 2004
-------- ---------
Senior Secured Term Loan Facility(a) ...... $100,000 $100,000
Senior Secured Revolving Credit Facility(a) 50,000 100,000
Secured Installment Loan(b) ............... 10,369 10,369
SAILS exchangeable debt(c) ................ 81,463 83,727
Other(d) .................................. 60 63
-------- --------
Total debt ................................ 241,892 294,159
Less: Current maturities .................. 79,183 118,072
-------- --------
$162,709 $176,087
======== ========
(a) On December 29, 2004, we entered into a credit facility to be used (i) to
repay in full our then outstanding senior indebtedness, comprised of a
short-term credit facility and a prior revolving credit facility; (ii) for
working capital and general corporate purposes; and (iii) to pay certain
fees and expenses incurred in connection with such transactions. Pursuant
to this credit facility, the lenders severally agreed to provide us the
following: (a) a senior secured term loan facility in an aggregate
principal amount of $100,000 and (b) a senior secured revolving credit
facility in an aggregate principal amount of up to $150,000 with a $20,000
sub limit available for letters of credit. This facility is secured on a
first priority basis by (i) a pledge of all of the capital stock or other
equity interests of our domestic subsidiaries, (ii) a pledge of 65% of the
capital stock or other equity interests of selected overseas subsidiaries
located in the United Kingdom, the Netherlands and Japan, (iii) 100% of the
capital stock of the manufacturing entity in Reynosa, Mexico and all of its
other assets and (iv) all our other domestic assets (other than real
estate) and the stock of our domestic subsidiaries.
On December 29, 2004, we borrowed $100,000 under the term loan facility and
$100,000 under the revolving credit facility. On February 3, 2005, we
repaid $50,000 of the outstanding balance under the revolving credit
facility. The term loan facility is payable at approximately $11,111 per
quarter, which commences on December 15, 2005 through the term loan
maturity date of December 30, 2007. The revolving credit facility matures
on December 30, 2009. The revolving credit facility is classified as short
term on the Condensed Consolidated Balance Sheet as our intention is to pay
it off currently. We incurred approximately $3,600 of deferred financing
costs related to the new credit facility. The interest rate on the credit
facility is the greater of (i) the prime rate and (ii) the federal funds
rate plus 0.5%, plus, in both cases, the applicable margin for U.S.-based
loans. For Eurodollar-based loans, the rate is the adjusted LIBO rate
(defined as the LIBO rate multiplied by the statutory reserve rate) plus
the applicable margin. The applicable margin is based upon our leverage
ratio (defined as the ratio of our total indebtedness to our consolidated
EBITDA for the period of the most recent four fiscal quarters) plus 0.25%
to 1% for U.S.-based loans and 1.25% to 2% for Eurodollar-based loans. The
interest rate on our outstanding borrowings at March 31, 2005 for the
$100,000 term loan facility was 4.50% for $50,000 and 4.41% for $50,000.
The interest rate on the $50,000 revolving credit facility at March 31,
2005 was 4.47%. The credit facility contains a number of security and
financial covenants; we are in compliance with all covenants as of March
31, 2005.
(b) On March 31, 2004, we entered into a purchase money secured installment
loan with a bank for $13,825. The loan is payable in four semiannual
installments of $3,655, including interest which commenced October 1, 2004.
The proceeds received under the loan were used to finance the purchases of
certain software. The fixed interest rate on this installment loan is
5.33%. This installment loan is collateralized by the purchased software.
As of March 31, 2005, the outstanding balance on this loan was $10,369.
(c) In order to provide additional liquidity to be used for general corporate
purposes, including the repayment of our then debt outstanding under a
revolving credit facility and to effectively lock in the gain recognized
upon the sale of our Cisco Systems, Inc. ("Cisco") shares, while deferring
a tax liability in January 2001, we entered into a private Mandatorily
Exchangeable Securities Contract for Shared Appreciation Income Linked
Securities ("SAILS") with a highly rated financial institution. The
securities that underlie the SAILS contract represent our investment in
Cisco common stock, which was acquired in connection with the Telxon
acquisition. This debt has a seven-year maturity and bears interest at a
cash coupon rate of 3.625 percent of the original notional amount of debt
of $174,200. At maturity, the SAILS are exchangeable for shares of Cisco
common stock or, at our option, cash in lieu of shares. Net proceeds from
the issuance of the SAILS and termination of an existing freestanding
collar arrangement were approximately $262,246. The SAILS contain an
embedded equity collar, which effectively manages a large portion of our
exposure to fluctuations in the fair value of our holdings in Cisco common
stock. We account for the embedded equity collar as a derivative financial
instrument in accordance with the requirements of SFAS 133, "Accounting for
Derivative Instruments and
12
Hedging Activities", as amended. The change in fair value of this
derivative between reporting dates is recognized as other expense/income.
The derivative has been combined with the debt instrument in long-term debt
as there is a legal right of offset in accordance with FASB Interpretation
No. 39, "Offsetting of Amounts Related to Certain Contracts." Since
inception, the gross SAILS liability remains unchanged at $174,200. The
derivative asset was valued at $92,737 and $90,473 on March 31, 2005 and
December 31, 2004, respectively. The net SAILS liability, when offset by
the derivative asset, represents $81,463 and $83,727 of the total long-term
debt balance outstanding at March 31, 2005 and December 31 2004,
respectively. We have the option to terminate the SAILS arrangement prior
to its scheduled maturity. If we terminate the SAILS arrangement prior to
its scheduled maturity by delivering our Cisco common stock our cash
payment would not exceed the present value of our future coupon payments at
the time of termination.
(d) Other long-term debt of $60 and $63 at March 31, 2005 and December 31,
2004, respectively, represent capital lease obligations and various other
loans maturing through 2007.
Based on the borrowing rates currently available to us for bank loans with
similar terms, the fair values of borrowings under the credit facility and
promissory notes, approximate their carrying values.
8. ACQUISITIONS
a. Brazil acquisition
The Company amended a previous agreement with certain shareholders of our
majority-owned subsidiary that serves as our Brazilian distributor and customer
service entity ("Symbol Brazil"), whereby on January 10, 2004, we purchased an
additional 34% ownership interest of Symbol Brazil. The Company paid $4,050 and
also forgave a pre-existing $5,000 loan and related accrued interest of $92 that
had been made to an entity affiliated with the minority shareholders.
Accordingly, the Company now owns 85 percent of Symbol Brazil. As a result of
the transaction, the Company satisfied the obligation related to a previous
minimum earnout requirement of approximately $2,337 at January 10, 2004 and
recorded the excess purchase price of approximately $1,805 as goodwill. Under
the terms of the relevant agreements, Symbol Brazil had its corporate form
changed into a corporation and it will eventually become a wholly owned
subsidiary of the Company, directly or indirectly. If Symbol Brazil meets
certain revenue targets over relevant time periods, the Company will be required
to purchase additional ownership interests from the minority shareholders.
b.Matrics, Inc.
On September 9, 2004, we consummated the acquisition of privately held
Matrics. Based in Rockville, Maryland, Matrics was a leader in developing
Electronic Product Code ("EPC")-compliant RFID systems. RFID is a next
generation data capture technology that utilizes small tags that emit radio
signals. Attaching a tag to products or assets allows for remote reading of
information relevant to the asset. While similar to a bar code, RFID does not
require physical contact between the reader and the tag, or even a line of
sight, it provides the ability to capture more data more efficiently and is
beneficial in areas such as supply chain management, asset tracking and
security. We believe the acquisition of Matrics is an important step in
executing our plan to be a leader in RFID, and will expand our product
offerings.
Matrics focused its strategic RFID solutions efforts on Electronic Product
Code standards, which are the emerging global RFID standards. Matrics developed
EPC-compliant RFID systems for retail, defense, transportation and other
vertical markets. The product portfolio acquired from Matrics features RFID
systems including multi-protocol, EPC-compliant fixed readers; readers designed
for embedded applications, such as RFID printers and mobile computers;
high-performance antennas for RFID tag reading; and EPC labels that can be
attached to items such as containers, pallets, cartons and more. The RFID tag
family includes both read-only and read/write functionality to address a wide
range of asset visibility applications. At the time of the acquisition, Matrics
was also developing a proprietary manufacturing process that is expected to
provide for higher volume and more cost effective manufacturing of tags.
The aggregate purchase price of $237,354 consisted of $230,000 in cash
payments to the sellers and $7,354 in transaction costs, primarily professional
fees. The purchase price was funded from borrowings under the $250,000
short-term credit facility which was replaced in December 2004 with our existing
credit facility (see note 7a). The results of Matrics have been included in
Symbol's consolidated financial statements since September 9, 2004, the
acquisition date.
The following unaudited pro forma consolidated financial information for
the three months ended March 31, 2004, give effect to the acquisition as if it
had been consummated as of the earliest period presented, after giving effect to
the following adjustments (i)
13
amortization of acquired intangible assets (ii) Symbol's financing costs,
consisting of interest expense on the $250,000 short term credit facility that
would have been incurred had the acquisition occurred as of January 1, 2004 and
the amortization of the debt issuance costs over the term (one-year) of the
short term credit facility and (iii) the related income tax effects:
THREE MONTHS ENDED MARCH 31,
2004
----
Revenue............................................ $ 420,964
Net loss........................................... (437)
Diluted loss per share............................. $ --
The unaudited pro forma consolidated financial information is presented for
comparative purposes only and is not intended to be indicative of the actual
results that would have been achieved had the transaction been consummated as of
the dates indicated above, nor does it purport to indicate results that may be
attained in the future.
9. CONTINGENCIES
a. Product Warranties
FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others" ("FIN 45"), requires that upon issuance of a guarantee, the guarantor
must disclose and recognize a liability for the fair value of the obligation it
assumes under that guarantee. The disclosure requirements of FIN 45 are
applicable to the Company's product warranty liability.
We provide standard warranty coverage for most of our products generally
ranging for periods of one year up to five years from the date of shipment. We
record a liability for estimated warranty claims based on historical claims,
product failure rates and other factors. Management reviews these estimates on a
regular basis and adjusts the warranty reserves as actual experience differs
from historical estimates or other information becomes available. This warranty
liability primarily includes the anticipated cost of materials, labor and
shipping necessary to repair and service the equipment.
The following table illustrates the changes in our warranty reserves from
December 31, 2004 to March 31, 2005:
AMOUNT
------
Balance at December 31, 2004.................................. $ 20,956
Charges to expense -- cost of revenue......................... 7,436
Utilization/payment........................................... (5,452)
-----------
Balance at March 31, 2005..................................... $ 22,940
===========
b. Derivative Instruments and Hedging Activities
Assets and liabilities of foreign subsidiaries where the local currency is
the functional currency are translated at quarter-end exchange rates. Changes
arising from translation are recorded in the accumulated other comprehensive
earnings component of stockholders' equity. Results of operations are translated
using the average exchange rates prevailing throughout the year. Gains and
losses from foreign currency transactions are included in the Condensed
Consolidated Statements of Income for the periods presented and are not
material.
We follow the provisions of SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended. SFAS No. 133 requires the
recognition of all derivative instruments as either assets or liabilities in the
consolidated balance sheet measured at fair value. Changes in fair value are
recognized immediately in earnings unless the derivative qualifies as a cash
flow hedge. For derivatives qualifying as cash flow hedges, the effective
portion of changes in fair value of the derivative instrument is recorded as a
component of other comprehensive earnings and is reclassified to earnings in the
same period during which the hedged transaction affects earnings. Any
ineffective portion (representing the remaining gain or loss on the derivative
instrument in excess of the cumulative change in the present value of future
cash flows of the hedged transaction) is recognized in earnings as it occurs.
For fair value hedges, changes in fair value of the derivative, as well as the
offsetting changes in fair value of the hedged item, are recognized in earnings
each period.
14
We formally designate and document each derivative financial instrument as
a hedge of a specific underlying exposure as well as the risk management
objectives and strategies for entering into the hedge transaction upon
inception. We also assess whether the derivative financial instrument is
effective in offsetting changes in the fair value or cash flows of the hedged
item. We did not recognize any gain or loss related to hedge ineffectiveness for
the three months ended March 31, 2005 and 2004, respectively.
We do not use derivative financial instruments for trading purposes. All of
our hedges qualify for either cash flow or fair value hedge accounting, other
than a portion of our embedded equity collar contained in the private
Mandatorily Exchangeable Contract for Shared Appreciation Income Linked
Securities ("SAILS") arrangement (See Note 7c) as the related Cisco shares have
been designated as trading securities. However, the aforementioned portion of
the embedded equity collar and the related Cisco shares result in an economic
hedge as it effectively manages a large portion of the fluctuation in the Cisco
shares designated as trading securities. Accordingly, any change in fair value
of this embedded equity collar between reporting dates is recognized through
operations in other expense/income. In addition, the change in market value of
Cisco shares, designated as trading securities, between reporting dates is
recognized through operations in other expense/income. As of April 1, 2003, we
designated a portion of the embedded equity collar as a fair value hedge of our
Cisco shares designated as available-for-sale securities.
We also utilize derivative financial instruments to hedge the risk
exposures associated with foreign currency fluctuations for payments denominated
in foreign currencies from our international subsidiaries. These derivative
instruments are designated as either fair value or cash flow hedges, depending
on the exposure being hedged, and have maturities of less than one year. Gains
and losses on these derivative financial instruments and the offsetting losses
and gains on hedged transactions are reflected in the Consolidated Statements of
Income as a component of cost of revenue. Such (losses) and gains were ($2,407)
and $1,786 for the three months ended March 31, 2005 and 2004, respectively. We
do not use these derivative financial instruments for trading purposes.
As of March 31, 2005 and December 31, 2004, respectively, we had $45,789
and $70,632 in notional amounts of forward exchange contracts outstanding. The
forward exchange contracts generally have maturities that do not exceed 12
months and require us to exchange foreign currencies for U.S. dollars at
maturity at rates agreed to at inception of the contracts. These contracts are
primarily denominated in British pounds, Euros, Australian dollars, Canadian
dollars and Japanese yen and have been marked to market each period with the
resulting gains and losses included in the Consolidated Statement of Income. The
fair value of these forward exchange contracts was $(1,157) and $(3,629) as of
March 31, 2005 and December 31, 2004 respectively, which was recorded in current
liabilities.
c. Legal matters
We are a party to lawsuits arising in the normal course of business.
Litigation arising in the normal course of business, as well as the lawsuits and
investigations described below, can be expensive, lengthy and disruptive to
normal business operations. Moreover, the results of complex legal proceedings
and government investigations are difficult to predict. Unless otherwise
specified, Symbol is currently unable to estimate, with reasonable certainty,
the possible loss, or range of loss, if any, for the lawsuits and investigations
described herein. An unfavorable resolution to any of the lawsuits or
investigations described below could have a material adverse effect on Symbol's
business, results of operations or financial condition.
GOVERNMENT INVESTIGATIONS
In May 2001, in response to an inquiry from the SEC, we retained a law
firm to conduct an internal investigation into certain allegations concerning
our accounting practices, focusing on specific transactions with two of our
customers but also including a limited review of other large transactions. The
law firm retained an accounting firm to assist it in the investigation. We
subsequently discovered that this investigation was hindered by certain of our
former employees. As a result of actions by these former employees, the SEC
expressed dissatisfaction with the investigation.
In March 2002, we retained a second law firm to conduct a wide-ranging
internal investigation into our accounting practices. The investigation was
conducted over a period of approximately eighteen months with the assistance of
an outside forensic accounting team. The SEC and the Eastern District commenced
separate but related investigations relating to our accounting practices.
The investigation found that, during the period covered by the
restatement, certain members of former management engaged in, directed and/or
created an environment that encouraged a variety of inappropriate activities
that resulted in accounting errors and irregularities affecting our previously
issued financial statements that we have now restated. The errors and
irregularities caused by these actions primarily concerned the timing and amount
of product and service revenue recognized. In particular, the investigation
found that revenue was accelerated from the appropriate quarters to earlier
quarters through a variety of improper means and, on a
15
more limited basis, revenue was improperly created and inflated on a net basis.
Additionally, there were errors and irregularities associated with the
establishment and utilization of certain reserves and restructurings, including
certain end-of-quarter adjustments that were apparently made in order to achieve
previously forecasted financial results. There were also errors and/or
irregularities associated with the administration of certain options programs,
as well as several categories of cost of revenue and operating expenses,
including efforts to artificially reduce reported inventory.
In addition, the internal investigation uncovered efforts by certain
then employees, including certain members of then management, to impede both the
initial and second internal investigations. The employees responsible for
directing such conduct resigned or were terminated.
The investigation found that, in addition to the specific items of
misconduct giving rise to the need for the restatement, there was a failure by
our former management to establish an appropriate control environment, and there
were significant failures in our internal controls and procedures resulting from
numerous causes, including inadequate hiring of qualified and experienced
personnel, insufficient training and supervision of personnel, a decentralized
accounting structure for operations in the United States and inadequate systems
and systems interfaces. The investigation also found instances in which some
members of former management and sales and finance-related employees devoted
insufficient attention and resources to ensuring accurate accounting and
financial reporting. As the guilty pleas of three former senior members of our
finance group illustrate, there were also instances in which such activity rose
to the level of criminal misconduct. All of the members of senior management who
were primarily responsible for the errors and irregularities underlying the
restatement either have been terminated from employment at Symbol as part of the
internal investigation or have left Symbol, including Tomo Razmilovic, one of
our former Presidents, Chief Executive Officers and directors, and Kenneth
Jaeggi, our former Senior Vice President and Chief Financial Officer. We
assembled a new management team and appointed new board members beginning in
mid-2002.
In November 2002, we announced the unaudited, preliminary expected
magnitude of the anticipated restatement of our financial statements, and
updated that information on several occasions over the subsequent eleven months.
Accordingly, the selected financial data for 1998, 1999, 2000 and 2001,
financial statements for the years ended December 31, 2000 and 2001, and
unaudited selected quarterly information for each of the four quarters of 2001
and the first three quarters of 2002 were restated in our 2002 Annual Report on
Form 10-K/A.
In connection with our accounting practices various class action
lawsuits were filed against us and certain of our former management and our
former board of directors in March 2002, March 2003 and May 2003. For more
information see " -- Securities litigation matters."
On June 3, 2004, we announced that we resolved the investigation by
the United States Attorney's Office for the Eastern District of New York
("Eastern District") relating to our past accounting practices by entering into
a non-prosecution agreement with the Eastern District. As a result of this
non-prosecution agreement, no criminal complaint will be filed against us. In
addition, on June 3, 2004, we announced an agreement with the SEC to resolve
allegations against us relating to our past accounting practices that were under
investigation by the SEC. Pursuant to the agreements with the Eastern District
and the SEC, we have paid a total of $37,000 in cash to a restitution fund for
members of the class consisting of purchasers of our common stock from February
15, 2000 to October 17, 2002, and $3,000 to the United States Postal Inspection
Service Consumer Fraud Fund. In addition to these payments, the non-prosecution
agreement included an acknowledgement by us that between 1999 and 2002, as a
result of the actions of certain of our former employees, we (a) violated
federal criminal law in connection with accounting practices involving improper
sales transactions, unsupported and fictitious accounting entries and the
manipulation of our accounting reserves and expenses; and (b) filed and caused
to be filed materially false and misleading financial statements and other
documents with the SEC. As part of the non-prosecution agreement, we agreed to
continue our cooperation with the Eastern District and the SEC, and to implement
remedial measures, including, but not limited to, retaining an independent,
government-approved examiner to review our internal controls, financial
reporting practices and our compliance with the settlement agreements and
establishing and maintaining an annual training and education program designed
to diminish the possibility of future violations of the federal securities laws.
If we violate the injunction with the SEC, the agreement with the Eastern
District or commit or attempt to commit other violations, such as accounting
offenses that were not the subject of the investigations, we will be subject to
federal criminal charges. Pursuant to the non-prosecution agreement we have
waived certain defenses that may have otherwise been available to us in the
event of a federal criminal charge, including the statute of limitations, and
will be subject to prosecution for any offense, including any offense related to
our past accounting practices. In addition, in the event of a violation of the
agreement and a federal criminal charge, statements that were made by or on
behalf of us to the Eastern District, SEC and the Postal Inspection Service,
including the acknowledgments of responsibility described above, will be deemed
admissible in evidence and certain evidentiary rules will not be available to
us. Pursuant to the agreement with the SEC, the SEC filed, and the court has
approved, a Final Consent Judgment in the Eastern District of New York
16
providing for injunctive relief, enjoining us from further violations of the
antifraud, reporting, books and records and internal control provisions of the
federal securities laws, and a civil penalty in the amount of $37,000, as
described above. We paid both the $37,000 and the $3,000 to the United States
Postal Inspection Service Consumer Fraud Fund prior to June 30, 2004.
On October 26, 2004, we issued a press release announcing our
financial results for the third quarter 2004. On November 8, 2004, we issued a
second press release, revising certain of the previously reported numbers. The
revised numbers included a reduction of approximately $13,600 in revenue for the
nine months ending September 30, 2004, as compared to the results previously
reported in the press release of October 26, 2004. The November 8, 2004 press
release stated that we had discovered certain discrepancies in the amount of
inventory at a distributor as well as inventory on hand that affected its
previously-announced results. On November 15, 2004, we filed our quarterly
report on Form 10-Q for the third quarter of 2004.
The non-prosecution agreement between us and the United States
Attorney's Office for the Eastern District of New York, described previously,
provides that should we violate the agreement or commit a crime in the future,
we would be subject to prosecution for any offense, including any offense
related to our past accounting practices. We retained outside counsel to
investigate the facts and circumstances surrounding the erroneous numbers
included in the October 26, 2004 press release. We have been cooperating with
the informal requests made by the Eastern District and by the SEC regarding this
matter, including whether we have complied with the injunction issued in
connection with the June 2004 settlement with the SEC and non-prosecution
agreement with the Eastern District. There can be no assurance that these events
will not give rise to an enforcement action or other proceeding brought by the
SEC or the Eastern District.
SECURITIES LITIGATION MATTERS
On June 3, 2004, we announced our settlement of the Pinkowitz, Hoyle
and Salerno class action lawsuits, which are described below. Under the
settlement, we agreed to pay to the class members an aggregate of $1,750 in cash
and an aggregate number of shares of common stock having a market value of
$96,250, subject to a minimum and maximum number of shares based upon the
volume-weighted moving average trading price of our common stock for the five
day period immediately prior to our payment of the common stock to the class
("Determined Price"). If the Determined Price is greater than $16.41 per share,
then we will issue 5,865.3 shares of our common stock to the class. If the
Determined Price is between $16.41 per share and $11.49 per share, then we will
issue to the class the number of shares of common stock equal to a market value
of $96,250 divided by the Determined Price. If the Determined Price is less than
$11.49 per share, we will issue 8,376.8 shares of our common stock to the class.
For example, the number of shares issuable on March 31, 2005, pursuant to the
settlement agreement would have been approximately 6,642.5 shares of which 586.5
were delivered in November 2004. The settlement also provides that we have the
right to pay up to an additional $6,000 in cash to reduce the number of shares
of our common stock that we are required to deliver in an amount equal to the
amount of additional cash divided by the Determined Price. If (i) there occurs
any event that would lead to the de-listing of our common stock or our board of
directors recommends the approval of a tender offer or the purchase of a
majority of our common stock or (ii) the Determined Price is less than $11.90
per share, then the lead counsel for the plaintiffs can require us to place into
escrow the number of shares that would otherwise be payable to the class and
would have the right to sell all or any portion of the escrowed shares and
invest such proceeds until distribution to the class. If we do not deliver our
common stock as required by the settlement agreement within the ten days of such
requirement, the lead counsel for the plaintiffs may terminate the settlement
agreement. The court held a fairness hearing regarding the settlement on October
4, 2004 and approved the fairness of the settlement by an order entered on
October 20, 2004. On November 17, 2004, we delivered 586.5 shares, or 10% of the
settlement amount (at $16.41 per share), as satisfaction of the plaintiffs'
attorneys' fees incurred as of October 2004, pursuant to the court's order. We
currently expect to deliver the balance of the shares required to be issued
under the settlement late in the second quarter or in the third quarter of 2005.
As of March 31, 2005, we have reflected $86,625 as accrued litigation costs in
our current liabilities. For every $1.00 per share above $16.41 per share on the
date the shares are issued, an additional non-cash litigation charge of
approximately $5,300 (pre-tax) and $3,200 (after-tax) will be required to be
recorded in our income statement in 2005. Included in our basic and diluted
shares outstanding at March 31, 2005 is 6,642.5 shares for shares that would
have been issued under this settlement agreement.
In addition to the payments described above, the $37,000 civil penalty
imposed by the SEC, which we have already paid, will be distributed to the
class. Also, as part of the settlement, Dr. Jerome Swartz, our co-founder and
former chairman, paid $4,000 in cash in 2004 to the class to settle the claims
against him in the Pinkowitz and Hoyle class action lawsuits.
Pinkowitz v. Symbol Technologies, Inc., et al.
On March 5, 2002, a class action lawsuit was filed in the United
States District Court for the Eastern District of New York on behalf of
purchasers of our common stock between October 19, 2000 and February 13, 2002,
inclusive, against us and certain
17
members of our former management and our former board of directors. The
complaint alleged that the defendants violated the federal securities laws by
issuing materially false and misleading statements throughout the class period
that had the effect of artificially inflating the market price of our
securities. This case is subject to the settlement agreement described above.
Hoyle v. Symbol Technologies, Inc., et al.
Salerno v. Symbol Technologies, Inc., et al.
On March 21, 2003, a class action lawsuit was filed in the United
States District Court for the Eastern District of New York against us and
certain members of our former management and our former board of directors. On
May 7, 2003, a virtually identical class action lawsuit was filed against the
same defendants by Joseph Salerno.
The Hoyle and Salerno complaints were brought on behalf of a class of
former shareholders of Telxon Corporation ("Telxon") who obtained our common
stock in exchange for their Telxon stock in connection with our acquisition of
Telxon in November 2000. The complaint alleges that the defendants violated the
federal securities laws by issuing a Registration Statement and Joint Proxy
Statement/Prospectus in connection with the Telxon acquisition that contained
materially false and misleading statements that had the effect of artificially
inflating the market price of our securities. These cases are subject to the
settlement agreement described above.
SMART MEDIA LITIGATION
Telxon v. Smart Media of Delaware, Inc.
On December 1, 1998, Telxon filed suit against Smart Media of
Delaware, Inc. ("SMI") in the Court of Common Pleas for Summit County, Ohio in a
case seeking a declaratory judgment that Telxon did not contract to develop
SMI's products or invest approximately $3,000 in SMI's business and that it did
not fraudulently induce SMI to refrain from engaging in business with others or
interfere with SMI's business relationships. On March 12, 1999, SMI filed its
answer and counterclaim denying Telxon's allegations and alleging counterclaims
against Telxon for negligent misrepresentation, estoppel, tortious interference
with business relationship and intentional misrepresentation and seeking
approximately $10,000 in compensatory damages, punitive damages, fees and costs.
In addition, William Dupre, an individual employed by SMI at that time, asserted
similar counterclaims against Telxon. In November 2000, Symbol acquired Telxon
with these claims still pending.
On September 17, 2003, the jury awarded approximately $218,000 in
damages against Telxon, of which approximately $6,000 was awarded to Mr. Dupre.
The court denied Telxon's motion for judgment in its favor notwithstanding the
verdict, for a new trial and for a reduction in the amount of the jury verdicts.
On May 6, 2004, the court entered judgment against Telxon for approximately
$218,000 in damages, plus statutory interest from the date of the verdicts and
granted a motion to add Symbol as a counterclaim defendant with respect to the
counterclaims asserted by Mr. Dupre. Prior to these court rulings, SMI withdrew
its motion to add Symbol as a counterclaim defendant with respect to the
counterclaims asserted by SMI. We and Telxon have filed notices of appeal of
these rulings and the related verdicts. Symbol and Telxon have deposited
approximately $50,000 into an interest-bearing court escrow account to stay
execution of the judgment against both Symbol and Telxon pending resolution of
the appeal. The parties completed the submission of briefs on this appeal in
March 2005. The court has scheduled oral argument in response to the appellate
briefs for June 3, 2005.
Our available cash, including cash available under our existing lines
of credit, may not be sufficient to pay jury verdicts of this size and we would
need to obtain additional financing in order to pay the judgment entered against
Telxon in this matter. In addition, we currently have not recorded any liability
in our consolidated financial statements with respect to the jury verdicts and
the judgment entered as we believe that, in accordance with the relevant
guidance set forth in Statement of Financial Accounting Standards No. 5,
"Accounting for Contingencies," an unfavorable outcome of this litigation is not
probable or estimatable at this time. However, there can be no assurance that we
will not be found to be ultimately liable for the full amount of the judgment,
plus statutory interest from the date of the verdicts. In the event we are found
liable, and the judgment is not paid, we would be in violation of the terms of
our credit facility. See Note 7.
PENDING PATENT AND TRADEMARK LITIGATION
Metrologic Instruments, Inc. v. Symbol Technologies, Inc.
18
On June 19, 2003, Metrologic Instruments, Inc. ("Metrologic") filed a
complaint against us in the United States District Court, District of New
Jersey, alleging patent infringement and breach of contract, and seeking
monetary damages of $2,300 (as of March 31, 2004) and termination of the
cross-licensing agreement between the parties. We answered the complaint and
asserted counterclaims for declaratory judgments of invalidity and
noninfringement of Metrologic's patents and for non-breach of the
cross-licensing agreement. We moved for partial summary judgment to dismiss
Metrologic's breach of contract claim. On October 18, 2004, the Court granted
Symbol's motion for summary judgment on Metrologic's breach of contract claim,
and also granted Symbol leave to assert certain defenses. On October 25, 2004,
Symbol asserted defenses of inequitable conduct with respect to Metrologic's
patents. We intend to defend the case vigorously on the merits.
Symbol Technologies, Inc. et al. v. Lemelson Medical, Educational & Research
Foundation, Limited Partnership
On July 21, 1999, we and six other members of the Automatic
Identification and Data Capture industry ("Auto ID Companies") jointly initiated
a lawsuit against the Lemelson Medical, Educational, & Research Foundation,
Limited Partnership ("Lemelson Partnership"). The suit was commenced in the
United States District Court, District of Nevada in Reno, Nevada, but was
subsequently transferred to the federal court in Las Vegas, Nevada. In the
litigation, the Auto ID Companies sought, among other remedies, a declaration
that certain patents, which had been asserted by the Lemelson Partnership
against end users of bar code equipment, were invalid, unenforceable and not
infringed.
The Lemelson Partnership had contacted many of the Auto ID Companies'
customers demanding a one-time license fee for certain so-called "bar code"
patents transferred to the Lemelson Partnership by the late Jerome H. Lemelson.
We had received many requests from our customers asking that we undertake the
defense of these claims using our knowledge of the technology at issue, and the
other Auto ID Companies had received similar requests. Certain of our customers
had requested indemnification against the Lemelson Partnership's claims from us,
and certain customers of the other Auto ID Companies had requested similar
indemnification from them, individually and/or collectively with other equipment
suppliers. We believe that generally we had no obligation to indemnify our
customers against these claims and that the patents being asserted by the
Lemelson Partnership against our customers with respect to bar code equipment
are invalid, unenforceable and not infringed.
On January 23, 2004, the court concluded that Lemelson's patent claims
are unenforceable under the equitable doctrine of prosecution laches; that the
asserted patent claims as construed by the court are not infringed by us because
use of the accused products does not satisfy one or more of the limitations of
each and every asserted claim; and that the claims are invalid for lack of
enablement even if construed in the manner urged by Lemelson. The court entered
its judgment in favor of Symbol and the other Auto ID Companies on January 23,
2004. The Lemelson Partnership filed several post-trial motions all of which
were denied by the court. The Lemelson Partnership filed a notice of appeal on
June 23, 2004. Briefs on appeal have been filed by the parties. The court has
scheduled oral arguments for June 6, 2005.
Intermec IP Corp. v. Matrics, Inc.
On June 7, 2004, Intermec IP Corp., a subsidiary of Intermec
Technologies Corporation ("Intermec"), filed suit against Matrics in the Federal
District Court in Delaware asserting infringement of four patents owned by
Intermec IP Corp. relating to RFID readers and RFID tags. The complaint against
Matrics seeks payment of a "reasonable royalty" as well as an injunction against
Matrics from infringing such patents. On September 9, 2004, Symbol consummated
the acquisition of Matrics. Matrics was merged into Symbol on October 29, 2004,
and accordingly, Symbol is defending the case vigorously on the merits.
On January 21, 2005, Matrics filed an Amended Answer and Counterclaim
to which Intermec replied on February 4, 2005. On January 25, 2005, Matrics
filed a motion to dismiss Intermec IP Corp.'s damages claims insofar as they
seek damages for the period after October 29, 2004, the date on which Matrics
was merged into Symbol and ceased to exist. In the alternative, Matrics moved to
substitute Symbol for Matrics as successor-in-interest to Matrics. Intermec IP
Corp. initially opposed the motion, but subsequently withdrew its opposition to
substituting Symbol for Matrics. Symbol filed an amended answer and
counterclaims on April 6, 2005. On April 20, 2005, Intermec IP Corp. filed an
Amended and Supplemental Complaint which formally substituted Symbol for Matrics
as the defendant.
The Court entered a Scheduling Order on February 8, 2005. The Order
provides for a Markman claim construction hearing to be held September 7, 2005.
The case is scheduled for a ten day jury trial beginning on May 1, 2006.
Discovery is under way.
Symbol Technologies, Inc. v. Intermec Technologies Corporation
19
On March 10, 2005, Symbol filed a patent infringement suit against
Intermec in the United States District Court for the District of Delaware,
asserting infringement of four Symbol patents relating to wireless technology.
On March 23, 2005, Intermec asserted counterclaims against Symbol for alleged
infringement of six Intermec patents. The Intermec patents relate to wireless
scanners, signature capture technology and bar code readers with multi-tasking
operating systems. Symbol responded to Intermec's infringement claims on April
11, 2005 and asserted counterclaims seeking declarations that the Intermec
patents were invalid and not infringed. Symbol intends to defend the case
vigorously on the merits.
Nanopower Technologies, Inc. v. Symbol Technologies, Inc. and Matrics Technology
Systems, Inc.
On August 11, 2004, Nanopower Technologies, Inc. ("Nanopower"), a
California corporation, filed a civil suit against Matrics and Symbol in state
court in California. The suit alleges that Matrics breached a consulting
agreement, confidentiality agreement and intellectual property licensing
agreement pertaining to certain ultra low voltage RFID tag start-up technology
to which Nanopower claims ownership and that the defendants violated California
state law relating to the protection of trade secrets. The suit also named
Symbol as a defendant because of Symbol's announced intention to purchase
Matrics. Nanopower alleges that Symbol (i) has improperly received disclosure of
Nanopower's confidential information, (ii) has, or will, misappropriate
Nanopower's trade secrets as a consequence of the acquisition of Matrics and
(iii) will benefit from the alleged breaches of the intellectual property
licensing and consulting agreements. On September 9, 2004, Symbol consummated
the acquisition of Matrics. Matrics was merged into Symbol on October 29, 2004,
and accordingly, Symbol is defending the case vigorously on the merits.
Matrics' agreements with Nanopower provide for mandatory arbitration
of these disputes in Washington, DC and contain an exclusive venue clause
requiring any effort to obtain injunctive relief to be filed in Maryland. The
state court complaint was removed to federal court and Matrics has filed a
motion to transfer the suit to Maryland in anticipation of a subsequent stay
pending arbitration. On October 1, 2004, before the Court heard Matrics' motion,
Nanopower agreed to and the parties filed a stipulation to stay the case pending
mediation, and if necessary, arbitration. A mediation was held on December 21,
2004, in an effort to resolve this matter. However, no resolution was reached.
Symbol has been informed by Nanopower's attorneys that they intend to pursue an
arbitration. One of Nanopower's claims is for breach of a consulting agreement,
based on Matrics' failure to pay an invoice in the amount of approximately $38.
On February 15, 2005, the Company sent to Nanopower a check in the amount of the
invoice, plus accrued interest. It is not yet known if Nanopower will seek to
arbitrate its other claims.
OTHER LITIGATION
Barcode Systems, Inc. v. Symbol Technologies Canada, Inc. and Symbol
Technologies, Inc.
On March 19, 2003, Barcode Systems, Inc. ("BSI") filed an amended
statement of claim in the Court of Queen's Bench in Winnipeg, Canada, naming
Symbol Technologies Canada, Inc. and Symbol as defendants. BSI alleges that we
deliberately, maliciously and willfully breached our agreement with BSI under
which BSI purported to have the right to sell our products in western Canada and
to supply Symbol's support operations for western Canada. BSI has claimed
damages in an unspecified amount, punitive damages and special damages.
Symbol denies BSI's allegations and claims that it properly terminated
any agreements between BSI and Symbol. Additionally, Symbol filed a counterclaim
against BSI alleging trademark infringement, depreciation of the value of the
goodwill attached to Symbol's trademark and damages in the sum of Canadian
$1,300, representing the unpaid balance of products sold by Symbol to BSI.
Discovery in the matter is ongoing.
On October 30, 2003, BSI filed an Application For Leave with the
Canadian Competition Tribunal ("Tribunal"). BSI sought an Order from the
Tribunal that would require us to accept BSI as a customer on the "usual trade
terms" as they existed prior to the termination of their agreement in April
2003. The Tribunal granted leave for BSI to proceed with its claim against us on
January 15, 2004. We filed an appeal of the Tribunal's decision before the
Federal Court of Appeals on January 26, 2004, and a brief in support of the
appeal on April 22, 2004. On October 7, 2004, the Federal Court of Appeals
dismissed Symbol's appeal, allowing BSI to make its application before the
Tribunal against Symbol.
On November 17, 2003, BSI filed an additional lawsuit in British
Columbia, Canada against us and a number of our distributors alleging that we
refused to sell products to BSI, conspired with the other defendants to do the
same and used confidential information to interfere with BSI's business. We
intend to defend against these claims vigorously.
Lic. Olegario Cavazos Cantu, on behalf of Maria Leonor Cepeda Zapata vs. Symbol
de Mexico, Sociedad de R.L. de C.V.
20
Lic. Olegario Cavazos Cantu, on behalf of Maria Leonor Cepeda Zapata
filed a lawsuit against Symbol de Mexico, Sociedad de R.L. de C.V. ("Symbol
Mexico") in October 2003 to reclaim property on which our Reynosa facility is
located. The lawsuit was filed before the First Civil Judge of First Instance,
5th Judicial District, in Reynosa, Tamaulipas, Mexico. The First Civil Judge
ordered the recording of a lis pendens with respect to this litigation before
the Public Register of Property in Cd. Victoria, Tamaulipas.
The plaintiff alleges that she is the legal owner of a tract of land
of 100 hectares, located within the area comprising the Rancho La Alameda,
Municipality of Reynosa, Tamaulipas, within the Bajo Rio San Juan, Tamaulipas,
irrigation district. The plaintiff is asking the court to order Symbol Mexico to
physically and legally deliver to the plaintiff the portion of land occupied by
Symbol Mexico.
Symbol Mexico acquired title to the lots in the Parque Industrial
Reynosa from Edificadora Jarachina, S.A. de C.V. pursuant to a deed instrument.
An Owner's Policy of Title Insurance was issued by Stewart Title Guaranty
Company in connection with the above-mentioned transaction in the amount of
$13,400. A Notice of Claim and Request for Defense of Litigation was duly
delivered on behalf of Symbol to Stewart Title Guaranty Company on November 4,
2003.
In late November 2004, the First Level Civil Judge entered a final
judgment in this matter for Symbol. In his decision, the judge held that, while
the plaintiff had established she had title to a tract of land, she failed to
establish that her parcel is the property on which Symbol's Reynosa
manufacturing facility is located. The judge further held that, based on the
plaintiff's complaint, it was not possible to identify the location of the
property to which plaintiff claims title.
The plaintiff has appealed the judgment to the Court of Second
Instance. In April 2005, the Court of Second Instance rejected the plaintiffs
appeal. The plaintiff has the right to further appeal this recent decision.
Bruck Technologies Handels GmbH European Commission Complaint
In February 2004, we became aware of a notice from the European
Competition Commission ("EC") of a complaint lodged with it by Bruck
Technologies Handels GmbH ("Bruck") that certain provisions of the Symbol
PartnerSelect(TM) program violate Article 81 of the EC Treaty. Bruck has asked
the EC to impose unspecified sanctions. We have provided all information
requested by the EC and will respond to any additional inquiries. No action has
been taken and the matter is pending. We intend to defend against these claims
vigorously.
10. INCOME TAXES
The Company's effective tax rate for the three months ended March 31, 2005
is a benefit of (24.85) percent. This differs from the statutory rate of 35
percent primarily due to benefits in the three months ended March 31, 2005
attributable to nonrecurring refunds and settlements relating to foreign and
domestic tax issues and the receipt of favorable rulings from tax authorities as
well as the allocable portion of the annual forecast of the tax benefits of
research credits. Excluding the nonrecurring items, the effective tax rate would
have been 33.8 percent.
Due to a change in New York State Tax law in April 2005, the Company's
deferred tax assets must be re-valued in the second quarter of 2005. Although
the Company expects future substantial tax savings as a result of the law
change, a charge of approximately $5,000 in the three months ended June 30,
2005, reflecting the reduction of certain deferred tax assets, will increase the
Company's effective tax rate for the second quarter and year ended December 31,
2005.
On October 22, 2004 the President signed the American Jobs Creation Act of
2004 ("AJCA"). The AJCA creates a temporary incentive for U.S. corporations to
repatriate accumulated income earned abroad by providing an 85 percent dividends
received deduction for certain dividends from controlled foreign corporations.
The deduction is subject to a number of limitations and, as of today,
uncertainty remains as to how to interpret numerous provisions of the AJCA. As
such, we are not yet in a position to decide on whether, and to what extent, we
might repatriate foreign earnings that have not yet been remitted to the U.S.
Based on analysis to date, we expect to repatriate up to $95,000 in accordance
with this temporary incentive. The resulting tax impact of repatriation cannot
be reasonably estimated at this time. We expect to finalize our assessment of
this new provision by September 30, 2005.
21
11. EXECUTIVE RETIREMENT PLANS
Effective January 1, 2005, Symbol changed certain aspects of its Executive
Retirement Plan (the "Plan"). The Plan change eliminated the participation of
certain highly compensated current associates who were formerly in the Plan.
Simultaneously, the Company commenced implementation of a non-qualified deferred
compensation plan for its eligible associates. These changes resulted in a Plan
settlement and curtailment and, accordingly, Symbol recognized in its Condensed
Consolidated Statement of Income a settlement benefit of $2,386 and an
additional expense associated with prior service of $1,397. This net benefit of
$989 was further reduced by on-going interest costs associated with the Plan of
$258. Our obligations under the Plan are not funded. The components of the net
periodic benefit cost for the three months ended March 31, 2005 and 2004 are as
follows:
THREE MONTHS ENDED
MARCH 31,
2005 2004
----- -----
COMPONENTS OF NET PERIODIC BENEFIT COST:
Service cost ...................................... $ -- $ 370
Interest cost ..................................... 258 322
Amortization of prior service cost ................ -- 66
Settlement and curtailment, net ................... (989) --
----- -----
Net periodic benefit cost ......................... $(731) $ 758
===== =====
EMPLOYER CONTRIBUTIONS TO THE EXECUTIVE RETIREMENT PLAN
We previously disclosed in our financial statements for the year ended
December 31, 2004, that we expected to contribute approximately $461 to the
Executive Retirement Plan to cover expected benefit payments due to certain
participants during 2005. As of March 31, 2005, $115 has been paid and we
anticipate contributing an additional $346 before the end of 2005 to cover the
expected benefit payments for the Executive Retirement Plan in 2005, bringing
the total to $461.
DEFERRED COMPENSATION PLAN
Effective January 1, 2005, Symbol commenced implementation of a
non-qualified deferred compensation plan, in which certain highly compensated
associates are eligible to participate. Selected associates, including but not
limited to those former participants in the Executive Retirement Plan, will be
eligible to receive annual Company contributions made as deposits into accounts
for their benefit. The amount of the contribution will be based on the Company's
performance for the preceding fiscal year and may range from a minimum of 6
percent to a maximum of 12 percent of the participant's aggregate cash
compensation for the immediately preceding fiscal year. Such contributions will
be deemed to be 50 percent in cash and 50 percent in common stock and will vest
in accordance with the vesting schedule applicable to the deferred compensation
plan. As of March 31, 2005, $166 has been accrued for this benefit and we
anticipate contributing an additional $498 before the end of 2005 to cover the
expected benefit payments for the deferred compensation plan in 2005, bringing
the total to $664.
12. BUSINESS SEGMENTS AND OPERATIONS BY GEOGRAPHIC AREAS
Our business consists of delivering products and solutions that capture,
move and manage information in real time to and from the point of business
activity. In addition, we provide customer support for our products and
professional services related to these products and solutions. These services
are coordinated under one global services organization. As a result, our
activities are conducted in two reportable segments, Product and Services.
The Product segment sells products and solutions in the form of advanced
data capture equipment, mobile computing devices, RFID, wireless communication
equipment and other peripheral products and also receives royalties. The
Services segment provides solutions that connect our data capture equipment and
mobile computing devices to wireless networks. This segment also provides
worldwide comprehensive repair, maintenance, integration and support in the form
of service contracts or repairs on an as-needed basis. We use many factors to
measure performance and allocate resources to these two reportable segments. The
primary measurements are sales and gross profit. The accounting policies of the
two reportable segments are essentially the same as those used to prepare our
consolidated financial statements. We rely on our internal management system to
provide us with necessary sales and cost data by reportable segment, and we make
financial decisions and allocate resources based on the information we receive
from this management system. In the measurement of segment performance, we do
not allocate research and development, sales and marketing,
22
or general and administrative expenses. We do not use that information to make
key operating decisions and do not believe that allocating these expenses is
significant in evaluating performance.
Our internal structure is in the form of a matrix organization whereby
certain managers are held responsible for product and services worldwide while
other managers are responsible for specific geographic areas. The operating
results of both components are reviewed on a regular basis.
We operate in three main geographic regions: The Americas (which includes
North and South America), EMEA (which includes Europe, Middle East and Africa)
and Asia Pacific (which includes Japan, the Far East and Australia). Sales are
allocated to each region based upon the location of the use of the products and
services. Non-U.S. sales for the three months ended March 31, 2005 and 2004 were
$168,447 and $166,485 respectively.
Identifiable assets are those tangible and intangible assets used in
operations in each geographic region. Corporate assets are principally goodwill,
intangible assets and temporary investments.
Summarized financial information concerning our reportable segments and
geographic regions is shown in the following table:
FOR THE THREE MONTHS ENDED
--------------------------
MARCH 31, 2005 MARCH 31, 2004
-------------- --------------
PRODUCT SERVICES TOTAL PRODUCT SERVICES TOTAL
------- -------- ----- ------- -------- -----
REVENUES:
The Americas (a) ............................ $263,833 $ 48,262 $312,095 $229,094 $ 45,277 $274,371
EMEA ........................................ 94,293 22,077 116,370 89,241 22,960 112,201
Asia Pacific ................................ 26,116 2,906 29,022 29,904 3,175 33,079
-------- -------- -------- -------- -------- --------
Total net sales ............................. $384,242 $ 73,245 $457,487 $348,239 $ 71,412 $419,651
======== ======== ======== ======== ======== ========
STANDARD GROSS PROFIT:
The Americas ................................ $142,091 $ 13,140 $155,231 $130,534 $ 8,532 $139,066
EMEA ........................................ 58,660 5,750 64,410 52,249 7,523 59,772
Asia Pacific ................................ 13,060 950 14,010 17,909 1,373 19,282
-------- -------- -------- -------- -------- --------
Total gross profit at standard .............. 213,811 19,840 233,651 200,692 17,428 218,120
Manufacturing variances & other related costs 27,435 655 28,090 23,192 -- 23,192
-------- -------- -------- -------- -------- --------
Total gross profit .......................... $186,376 $ 19,185 $205,561 $177,500 $ 17,428 $194,928
======== ======== ======== ======== ======== ========
a) Included in The Americas are revenues of approximately $23,055 and $21,205
from non-US countries, mainly Canada, Brazil and Mexico, for the three month
period ended March 31, 2005 and 2004, respectively.
Below is a summary of product revenues by product division for the three months
ended March 31, 2005 and 2004:
THREE MONTHS ENDED
MARCH 31,
---------
2005 2004
--------- ---------
PRODUCT DIVISION:
Mobile Computing $ 246,919 $ 206,517
Advanced Data Capture 100,127 109,898
Wireless Infrastructure 35,879 34,111
RFID 8,176 --
Other, net (6,859) (2,287)
--------- ---------
Total $ 384,242 $ 348,239
========= =========
Other, net represents royalty revenues and rebates which the Company does not
assign to a product division.
AS OF AS OF
MARCH 31, DECEMBER 31,
2005 2004
---------- ----------
IDENTIFIABLE ASSETS:
The Americas ...................................................... $ 921,477 $ 915,565
EMEA .............................................................. 309,565 322,490
Asia Pacific ...................................................... 58,915 52,385
Corporate (principally goodwill, intangible assets and investments) 581,311 639,929
---------- ----------
Total .......................................................... $1,871,268 $1,930,369
========== ==========
23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FORWARD-LOOKING STATEMENTS; CERTAIN CAUTIONARY STATEMENTS
This report contains forward-looking statements made in reliance upon the
safe harbor provisions of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended. These
statements may be identified by their use of words, such as "anticipate,"
"estimates," "should," "expect," "guidance," "project," "intend," "plan,"
"believe" and other words and terms of similar meaning, in connection with any
discussion of Symbol's future business, results of operations, liquidity and
operating or financial performance or results. Such forward looking statements
involve significant material known and unknown risks, uncertainties and other
factors which may cause the actual results, performance or achievements to be
materially different from any future results, performance or achievements
expressed or implied by such forward looking statements. For further information
related to other factors that have had, or may in the future have, a significant
impact on our business, financial condition or results of operations, see Item
1, "Risk Factors" in our Annual Report on Form 10-K for the year ended December
31, 2004.
In light of the uncertainty inherent in such forward-looking statements, you
should not consider the inclusion to be a representation that such
forward-looking events or outcomes will occur.
Because the information herein is based solely on data currently available,
it is subject to change and should not be viewed as providing any assurance
regarding Symbol's future performance. Actual results and performance may differ
from Symbol's current projections, estimates and expectations, and the
differences may be material, individually or in the aggregate, to Symbol's
business, financial condition, results of operations, liquidity or prospects.
Additionally, Symbol is not obligated to make public indication of changes in
its forward-looking statements unless required under applicable disclosure rules
and regulations.
The following discussion and analysis should be read in conjunction with
Symbol's Condensed Consolidated Financial Statements and the notes thereto that
appear elsewhere in this report.
OVERVIEW
We are a recognized worldwide leader in enterprise mobility, delivering
products and solutions that capture, move and manage information in real time to
and from the point of business activity. Symbol enterprise mobility solutions
integrate advanced data capture products, mobile computing platforms, wireless
communications infrastructure, mobility software and services programs under the
Symbol Enterprise Mobility Services brand. Our goal is to be one of the world's
preeminent suppliers of mission-critical mobile computing solutions to both
business and industrial users. For the three months ended March 31, 2005, we
generated $457,487 of revenue.
Symbol manufactures products and provides services to capture, move and
manage data using five core technologies: bar code reading and image
recognition, mobile computing, wireless networking systems, RFID and mobility
software applications. Our products and services are sold to a broad and diverse
base of customers on a worldwide basis and in diverse markets such as retail,
travel and transportation, warehousing and distribution, manufacturing,
healthcare, education and government.
We operate in two reportable business segments: (1) the design, manufacture
and marketing of advanced data capture, mobile computing, wireless
infrastructure, RFID and mobility software ("Product Segment") and (2) the
servicing of, customer support for and professional services related to these
systems ("Services Segment"). Each of our operating segments uses its core
competencies to provide building blocks for mobile computing solutions.
We are focused on delivering to our customers our enterprise mobility
products, solutions and services, which are designed to increase
cost-effectiveness, enhance efficiency and promote faster execution of critical
business processes. We have been focused on the following objectives:
- Expanding our position in enterprise mobility products and solutions. We
believe our ability to deliver innovative, end-to-end enterprise
mobility systems gives us a competitive advantage. Accordingly, we plan
to continue to invest in product developments. In September 2004, we
made a significant strategic acquisition of Matrics, and during 2004, we
entered into
24
strategic relationships to expand our capabilities in enterprise
mobility solutions with such companies as AT&T Wireless and Nextel.
- Continuing to improve and streamline our operations. Over the past two
years, we have restructured and reorganized our major business functions
to improve and streamline our business processes. As part of our
restructurings, we have combined our product marketing, research and
development and product engineering teams into a single Global Products
Group, moving from a product focus to a customer and market-centric
focus and have embarked on a program to enhance our core product lines,
which is substantially complete. In addition, we have taken significant
steps to improve our manufacturing efficiencies by moving the majority
of our manufacturing to lower cost, company-owned and contract
production facilities outside the United States. We plan to continue to
work to improve and streamline our business processes. Currently, we
have announced that we are developing a comprehensive action plan to
reduce our operating expenses and overall cost structure.
- Building upon our strong foundation of intellectual property. We have
and intend to continue to invest in research and development to enable
us to continue to offer high quality, differentiated and cost-effective
products to our customers. We have expended approximately $31,500 for
research and development during the three months ended March 31, 2005.
- Rationalizing product lines and pursuing platform-based products. We
believe that pursuing high value-added, platform-based products allows
us to increase our sales and margins. For example, on March 31, 2003, we
offered 17,012 active product configurations, which we reduced to 4,693
as of March 31, 2005. We believe this trend will continue as we further
rationalize our product lines and pursue platform based products. This
we believe sets the foundation of our segmented, or "bracketed" product
strategy. This strategy is designed to address all market segments
available to us. Our goal is to fill out each product line with a
high-end model, a mid-range device and an entry-level unit to appeal to
the lower end of the market. This we believe gives both legacy and new
customers product choice along a price-feature-performance continuum.
Management continuously evaluates its financial condition and operational
performance by monitoring key performance measures such as revenue growth, gross
profit and gross profit percent, operating income and margin, cash flow from
operations, days sales outstanding and inventory turns.
In addition to these financial and operational measures, management has
established certain other key measures to evaluate its future business
performance, such as product bookings and product backlog as well as product
sales through its indirect channel from both value added resellers ("VARs") and
distributors, and original equipment manufacturers ("OEMs"). In addition,
management has a strong focus on its customer satisfaction ratings in its
service business.
By evaluating our product bookings, we are able to gain visibility into the
momentum of our expected future sales volumes. This evaluation helps us to
identify areas in which we may need to adjust our sales and marketing efforts
and inventory management. Our goal is to maintain the ratio of our quarterly
product bookings to our actual product revenue recognized ratio greater than
1.0.
In addition, we evaluate the amount of backlog of products that we have
shipped but have not been recognized as revenue, as well as those products that
are awaiting shipment. This evaluation, we believe, assists us in improving our
quarterly linearity of shipments, and improves our operational efficiencies and
overall inventory management. Our goal is to continually grow our backlog.
We also believe that we need to build a strong partner ecosystem, which is a
key aspect in our ability to scale our business and important in our efforts to
penetrate new markets as well as boost our presence in our existing vertical
markets. To that extent, in 2002 we began migrating to a channel-centric
business model and introduced our PartnerSelect(TM) Program. Our goal is to have
more than 80 percent of our products shipped through our indirect channels, that
is our VARs, distributors and OEMs.
In our Services Segment, a key measure we monitor is customer satisfaction,
particularly for technical assistance and depot service delivery. We continually
conduct independent customer satisfaction surveys, with an overall goal of
achieving ratings consistently above a 4.0 on a scale of 1.0 to 5.0, with 5.0
being the highest level of satisfaction.
We also monitor the attach rates of our service maintenance contracts to our
product sales, which we believe gives us visibility into future growth of our
services segment.
OVERVIEW OF PERFORMANCE
25
Our total revenue for the three months ended March 31, 2005 was $457,487, an
increase of 9.0 percent from the total revenue of $419,651 in the comparable
prior year period. The increase in revenue is primarily attributable to growth
in our mobile computing division.
Our gross profit as a percentage of total revenue was 44.9 percent for the
three months ended March 31, 2005, a decrease from 46.5 percent for the three
months ended March 31, 2004. The reduction is primarily due to a strengthening
of the U.S. Dollar against foreign currencies as well as a greater than normal
mix of large customer, lower margin revenue in the three months ended March 31,
2005.
We are committed to and continue to invest in engineering new products and
in investing in our people, processes and systems to expand our product
offerings, to improve our control environment and our effectiveness with our
customers and our operational efficiencies. Accordingly, our operating expenses
were $181,238 for the three months ended March 31, 2005, an increase of 9.5%
from the total operating expenses of $165,473 in the comparable prior year
period.
Our operating margins for the three months ended March 31, 2005 was 5.3
percent compared to 7.0 percent for the three months ended March 31, 2004. This
decrease in margin resulted from our continued investment in our people,
processes and systems and the decrease in our gross margin.
Our cash balances remained relatively consistent with a cash balance of
$218,218 as of March 31, 2005 compared to $217,641 as of December 31, 2004, an
increase of $577, even though the first quarter of 2005 included a $50,000
payment to reduce our borrowings on our short-term revolving credit facility.
We continue to focus on effectively managing our accounts receivables. At
March 31, 2005, receivables were $111,143, a decrease of $2,515 from $113,658 as
of December 31, 2004. Our days sales outstanding at March 31, 2005 were 22 days
as compared to 23 days at December 31, 2004.
Our inventory turns increased to 5.8 from 4.2 for the three months ended
March 31, 2005 as compared to the comparable period in 2004 primarily due to the
one-time transfer of inventory to one of our larger retail customer's facilities
and improved efficiencies within operations.
Our gross product bookings were approximately $382,500 in the quarter ending
March 31, 2005, an increase of approximately 8.7% from the quarter ending March
31, 2004.
The ratio of our product bookings to product revenue was 1.0 for the quarter
ended March 31, 2005. Our product backlog, which is another measure we monitor,
increased in the quarter ending March 31, 2005 to approximately $328,700 as
compared to product backlog as of March 31, 2004 of approximately $300,000.
Essentially all of the reported backlog is expected to be shipped to the
customer in six months.
Our percent of product revenue that was shipped through our indirect channel
in the three months ended March 31, 2005 was approximately 75 percent. This is
up approximately 24 percentage points from 2002, when we began our migration to
a channel-centric business model.
Current results of customer satisfaction surveys from our services business
have demonstrated improvement towards our goal of a consistent rating greater
than 4.0. Our most current results were a score of 3.96 and 3.61, relating to
satisfaction with our technical assistance and depot service delivery,
respectively.
While our service attach rates have been improving in our sales in the
Americas, overall we believe we can achieve better attach rates and are making
changes in our business process and restructuring certain of our service
activities to help improve these attach rates in the future.
26
RESULTS OF OPERATIONS
The following table summarizes our revenue by geographic region and then by
reportable segment and geographic region for which we use to manage our
business:
FOR THE THREE MONTHS ENDED MARCH 31
-----------------------------------
VARIANCE IN VARIANCE IN
2005 2004 $ PERCENT
-------- -------- -------- -----------
Total Revenue
The Americas ........... $312,095 $274,371 $ 37,724 13.7%
EMEA ................... 116,370 112,201 4,169 3.7
Asia Pacific ........... 29,022 33,079 (4,057) (12.3)
-------- -------- -------- ----
Total Revenue ......... $457,487 $419,651 $ 37,836 9.0%
======== ======== ======== ====
Product Revenue
The Americas ........... $263,833 $229,094 $ 34,739 15.2%
EMEA ................... 94,293 89,241 5,052 5.7
Asia Pacific ........... 26,116 29,904 (3,788) (12.7)
-------- -------- -------- ----
Total Product Revenue . $384,242 $348,239 $ 36,003 10.3%
======== ======== ======== ====
Service Revenue
The Americas ........... $ 48,262 $ 45,277 $ 2,985 6.6%
EMEA ................... 22,077 22,960 (883) (3.8)
Asia Pacific ........... 2,906 3,175 (269) (8.5)
-------- -------- -------- ----
Total Service Revenue . $ 73,245 $ 71,412 $ 1,833 2.6%
======== ======== ======== ====
The following table summarizes our product revenue by product division:
FOR THE THREE MONTHS ENDED MARCH 31
-----------------------------------
VARIANCE IN VARIANCE IN
2005 2004 $ PERCENT
--------- ---------- ----------- -----------
Product Division
Mobile Computing ....... $ 246,919 $ 206,517 $ 40,402 19.6%
Advanced Data Capture .. 100,127 109,898 (9,771) (8.9)
Wireless Infrastructure 35,879 34,111 1,768 5.2
RFID ................... 8,176 -- 8,176 100.0
Other, net ............. (6,859) (2,287) (4,572) 200.0
--------- --------- --------- -----
Total ............... $ 384,242 $ 348,239 $ 36,003 10.3%
========= ========= ========= =====
Other, net represents royalty revenues and rebates which the Company
does not assign to a product division.
Product revenue for the three months ended March 31, 2005 was $384,242 an
increase of $36,003 or 10.3 percent from the comparable prior year period. This
increase included $8,176 of RFID revenue related to RFID products available
because of our Matrics acquisition, which was consummated September 9, 2004. In
addition, in the three months ended March 31, 2005, the Company transferred
inventory held at its own facility with a sales value of $27,100 to a customer
owned facility and believes the incremental increase in product revenue due to
the transfer of this inventory to be approximately $13,000. The Company
continues to experience growth in sales of its mobile computing product
offerings, our largest product line, which experienced growth of $40,402 or
19.6 percent from the comparable prior year period. The increase in mobile
computing is primarily due to the growth from our MC9000 gun and enterprise
digital assistant mobile computing devices. In addition, wireless product
revenue increased by $1,768 or 5.2 percent from the comparable prior year
period due to the introduction of a new wireless switch during 2004. Partially
offsetting these increases was a decline of $9,771 or 8.9 percent in our
advanced data capture division from the comparable prior year period which was
primarily driven by a large rollout of wireless point-of-sale scanners to a
nationwide U.S. retailer during the three months ended March 31, 2004. In
addition, other, net increased by $4,572 for the three months ended March 31,
2005 from the comparable prior year period, primarily due to changes to the
PartnerSelect model that increased rebates within our distribution partners
combined with their sales volume.
Services revenue for the three months ended March 31, 2005 was $73,245, an
increase of $1,833 or 2.6 percent from the comparable prior year period. The
increase for the three months ended March 31, 2005 as compared to the comparable
prior year period was primarily due to an increase in maintenance and support
services of approximately $5,500, which was positively impacted by $1,200 as a
result of recording new contracts on an accrual basis from a billed and
collected basis. This was partially offset by lower professional service revenue
resulting from our continued drive to utilize third party service providers for
the lower margin professional service activities.
Geographically, the Americas revenue increased 13.7 percent for the three
months ended March 31, 2005 from the comparable prior year period primarily due
to growth in mobile computing product offerings. Europe, Middle East and Africa
("EMEA") revenue increased 3.7 percent for the three months ended March 31, 2005
from the comparable prior year period due to growth in all product divisions.
Asia Pacific revenue decreased 12.3 percent for the three months ended March 31,
2005 compared to the comparable prior
27
year period which was primarily the result of decreased revenue in our advanced
data capture and wireless infrastructure product offerings. The Americas, EMEA
and Asia Pacific represent approximately 68.2, 25.4 and 6.4 percent of revenue,
respectively, for the three months ended March 31, 2005. The Americas, EMEA and
Asia Pacific represent approximately 65.4, 26.7 and 7.9 percent of revenue,
respectively, for the three months ended March 31, 2004.
Product gross profit for the three months ended March 31, 2005 was $186,376
an increase of $8,876 or 5.0 percent from the comparable prior year period. The
increase in product gross profit was mainly attributed to an increase in revenue
which accounted for approximately $18,400 of the increase for the three months
ended March 31, 2005. Offsetting the increase in product revenue was a decrease
in gross profit percentage of 2.5 percent or approximately $9,500 for the three
months ended March 31, 2005 mainly driven by a greater than normal mix of large
customer, lower margin revenue and sales of our RFID product at low single digit
margins during the three months ended March 31, 2005 as compared with the
comparable prior year period.
Service gross profit for the three months ended March 31, 2005 was $19,185
an increase of $1,757 or 10.1 percent from the comparable prior year period. The
increase in service gross profit was mainly attributed to a change in mix from
low margin professional services to higher margin maintenance and support
services which approximated $1,400. The remaining increase in service gross
profit was attributed to higher revenues which accounted for an increase of
approximately $400.
OPERATING EXPENSES
Total operating expenses of $181,238 increased 9.5 percent for the three
months ended March 31, 2005 from $165,473 for the comparable prior year period.
Operating expenses consist of the following for the three months ended March
31:
FOR THE THREE MONTHS ENDED MARCH 31,
------------------------------------
VARIANCE IN VARIANCE IN
2005 2004 $'S PERCENT
-------- -------- -------- -----------
Engineering ............ $ 42,351 $ 41,559 $ 792 1.9%
Selling, general and
administrative ........ 138,887 121,680 17,207 14.1
Stock-based compensation
expense ............... -- 2,234 (2,234) 100.0
-------- -------- -------- -----
$181,238 $165,473 $ 15,765 9.5%
======== ======== ======== =====
Engineering expenses increased $792 or 1.9 percent for the three months
ended March 31, 2005 as compared to the comparable prior year period, mainly due
to our increased investment in our research and development.
Selling, general and administrative expenses increased $17,207 or 14.1
percent for the three months ended March 31, 2005 as compared to the comparable
prior year period, mainly due to increased investment in technology,
infrastructure and financial systems, increased costs associated with the
defense of former Symbol associates and higher compensation costs and related
benefits, partially offset by a decrease in external consulting expenses
associated with the Sarbanes Oxley Act of 2002 and decreased severance costs
relating to former executives.
Included in total operating expenses for the three months ended March 31,
2004 is stock-based compensation associated with certain portions of our stock
option plans. Due to our inability to make timely filings with the SEC of our
financial statements through the nine months ended September 30, 2003, our stock
option plans were held in abeyance, meaning that our employees could not
exercise their options until we became current with our filings. As an
accommodation to both current and former Symbol associates whose options were
impacted by this suspension, the Compensation Committee of the Board approved an
abeyance program that allowed associates whose options were affected during the
suspension period the right to exercise such options up to 90 days after the end
of the suspension period. This resulted in a new measurement date for those
options, which led to a non-cash accounting compensation charge for the
intrinsic value of those vested options when the employee either terminated
employment during the suspension period or within the 90 day period after the
end of the suspension period. Stock based compensation related to the abeyance
program was $2,234 during the three months ended March 31, 2004. On February 25,
2004, the date on which we became current with our regulatory filings with the
SEC, this suspension period ended and, accordingly, there was no further
stock-based compensation recognized in the three months ended March 31, 2005
related to this matter.
OTHER (EXPENSE)/INCOME, NET
28
Other (expense)/income, net consists of the following:
FOR THE THREE MONTHS ENDED MARCH 31,
------------------------------------
2005 2004 VARIANCE
-------- -------- --------
Cisco SAILS(a)...... $ (3,475) $ 1,713 $(5,188)
Interest Expense.... (4,133) (1,378) (2,755)
Interest Income..... 1,030 603 427
Other............... 10 68 (58)
-------- -------- --------
$ (6,568) $ 1,006 $(7,574)
========= ======== ========
(a) In accordance with the provisions of SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" the gain or loss on the change in
fair value of the portion of our investment in CISCO common stock, coupled with
the gain or loss on the change in fair value of the embedded derivative has been
recorded as a component of other income or loss in each reporting period.
PROVISION FOR INCOME TAXES
The Company's effective tax rate for the three months ended March 31, 2005
is a benefit of (24.85) percent. This differs from the statutory rate of 35
percent primarily due to benefits in the three months ended March 31, 2005
attributable to nonrecurring refunds and settlements relating to foreign and
domestic tax issues and the receipt of favorable rulings from tax authorities as
well as the allocable portion of the annual forecast of the tax benefits of
research credits. Excluding the nonrecurring items, the effective tax rate would
have been 33.8 percent
Due to a change in New York State Tax law in April 2005, the Company's
deferred tax assets must be re-valued in the second quarter of 2005. Although
the Company expects future substantial tax savings as a result of the law
change, a charge of approximately $5,000 in the three months ended June 30,
2005, reflecting the reduction of certain deferred tax assets, will increase the
Company's effective tax rate for the second quarter and year ended December 31,
2005.
On October 22, 2004 the President signed the American Jobs Creation Act of
2004 ("AJCA"). The AJCA creates a temporary incentive for U.S. corporations to
repatriate accumulated income earned abroad by providing an 85 percent dividends
received deduction for certain dividends from controlled foreign corporations.
The deduction is subject to a number of limitations and, as of today,
uncertainty remains as to how to interpret numerous provisions of the AJCA. As
such, we are not yet in a position to decide on whether, and to what extent, we
might repatriate foreign earnings that have not yet been remitted to the U.S.
Based on analysis to date, we expect to repatriate up to $95,000 in accordance
with this temporary incentive. The resulting tax impact of repatriation cannot
be reasonably estimated at this time. We expect to finalize our assessment of
this new provision by September 30, 2005.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
The following table summarizes Symbol's cash and cash equivalent balances as
of March 31, 2005 and December 31, 2004 and the results of our statement of cash
flows for the three months ended March 31:
VARIANCE IN
2005 2004 DOLLARS
--------- --------- ----------
Cash and cash equivalents ..................................... $ 218,218(a) $ 217,641 $ 577
========= ========= =========
Net cash provided by /(used in):
Operating activities ....................................... $ 72,652 $ 40,789 $ 31,863
Investing activities ....................................... (22,804) (15,221) (7,583)
Financing activities ....................................... (44,954) 4,082 (49,036)
Effect of exchange rate changes on cash and cash equivalents (4,317) (634) (3,683)
--------- --------- ---------
Net increase in cash and cash equivalents .................... $ 577 $ 29,016 $ (28,439)
========= ========= =========
a) Does not include restricted cash of $51,636 comprised of $50,622 serving as
security for the trial court judgment against Telxon and Symbol for Telxon
vs. SmartMedia of Delaware, Inc. and $1,014 which is an interest-bearing
letter of credit pledged as a supplier bond.
Net cash provided by operating activities during the three months ended
March 31, 2005 was $72,652 as compared to $40,789 for the same period last year.
Net cash provided by operating activities increased $31,863 during the three
months ended March 31, 2005
29
as compared to the comparable prior year period primarily due to an increase in
net earnings of $15,340 and an increase in cash provided by inventory of
approximately $33,039, based on a decrease in inventory for the three months
ended March 31, 2005, and a decrease in cash used in accounts payable and
accrued expenses of $44,897. These increases were offset by decreases in other
operating assets and liabilities during the first quarter of 2005.
Net cash used in investing activities for the three months ended March 31,
2005 was $22,804 as compared to $15,221 for the same period last year. The
increase in cash used in investing activities of $7,583 during the three months
ended March 31, 2005, when compared to the same period last year, was primarily
due to $9,906 in additional capital expenditures, primarily related to our
investment in technology, infrastructure and financial systems.
Net cash used in financing activities during the three months ended March
31, 2005 was $44,954, as compared to net cash provided by financing activities
of $4,082 during the same period last year. The $49,036 increase in cash used in
financing activities during the three months ended March 31, 2005 primarily
consists of a $50,000 pay down of our short term credit facility during the
three months ended March 31, 2005. Additionally, there was a reduction of
$13,825 of proceeds from long-term debt and a reduction in proceeds from stock
option exercises of $4,980 offset by a $19,956 decrease in the purchases of
treasury stock during the three months ended March 31, 2005.
The following table presents selected key performance measurements we use to
monitor our business for the three months ended March 31:
2005 2004
---- ----
Days sales outstanding (DSO)..................................... 22 26
Inventory turnover............................................... 5.8 4.2
Our DSO and inventory turnover numbers are useful in understanding the
management of our balance sheet. However, the DSO numbers shown above may not be
directly comparable to those of other companies because our DSO numbers are
improved by the timing of our revenue recognized for our distributors, cash
received in advance of revenue recognition, part of our service revenue in the
Americas and our value-added resellers that lack economic substance, which we
recognize on a billed and collected basis.
We continue to effectively manage our net accounts receivables, ending March
31, 2005 with receivables of $111,143, a decrease of $2,515 from $113,658 at
December 31, 2004. Through aggressive collection strategies we have been able to
reduce our average days sales outstanding to 22 days during the three months
ended March 31, 2005 from an average of 26 days for the three months ended March
31, 2004.
Our inventory turns increased to 5.8 from 4.2 for the three months ended
March 31, 2005 as compared to the comparable period in 2004 primarily due to the
one-time transfer of inventory to one of our larger retail customer's facilities
and improved efficiencies.
OTHER LIQUIDITY MEASURES
Other measures of our liquidity including the following:
MARCH 31 DECEMBER 31,
2005 2004
---- ----
Working capital .............................................. $ 161,776 $ 135,985
(current assets minus current liabilities)
Current ratio (current assets to current liabilities) ........ 1.3:1 1.2:1
Long-term debt to capital .................................... 12.9% 14.1%
(Long-term debt as a percentage of long term debt plus equity)
Current assets as of March 31, 2005 decreased by $33,612 from December 31,
2004, primarily due to a decrease in inventory. Inventory decreased due to the
one time transfer of inventory to one of our larger retail customer's facilities
and improved efficiencies in operations. Current liabilities as of March 31,
2005 decreased $59,403 from December 31, 2004 primarily due to a $38,889
decrease in the current portion of long-term debt based upon repayments during
the three months ended March 31, 2005. Included in our current liabilities at
March 31, 2005 is $86,625 related to an amount due to our settlement of certain
litigation. We anticipate this amount will be paid through the issuance of
shares of stock, not cash. Our current ratio was 1.3:1 at March 31, 2005 and
1.2:1 at December 31, 2004.
FINANCING ARRANGEMENTS
30
During 2000, we entered into a $50,000 lease receivable securitization
agreement which was subsequently renewed until March 2005 without the payment of
amounts outstanding at such time, and has been further extended until March 31,
2006. During the three months ended March 31, 2005 and 2004, we did not
securitize any additional lease receivables. As of March 31, 2005, we had the
ability to securitize $44,154 under the lease receivable securitization
agreement. Factors that are reasonably likely to affect our ability to continue
using these financing arrangements include the ability to generate lease
receivables that qualify for securitization and the ability of the financial
institution to obtain an investment grade rating from either of the two major
credit rating agencies. We do not consider the securitization of lease
receivables to be a significant contributing factor to our continued liquidity.
EXISTING INDEBTEDNESS
At March 31, 2005 and December 31, 2004, our short-term financing and
long-term debt outstanding, excluding current maturities, was as follows:
MARCH 31, DECEMBER 31,
2005 2004
-------- --------
Senior Secured Term Loan Facility(a) ........... $100,000 $100,000
Senior Secured Revolving Credit Facility(a) .... 50,000 100,000
Secured installment loan(b) .................... 10,369 10,369
SAILS exchangeable debt(c) ..................... 81,463 83,727
Other(d) ....................................... 60 63
-------- --------
Total debt ................................... 241,892 294,159
Less: current maturities ....................... 79,183 118,072
-------- --------
Long-term debt ................................. $162,709 $176,087
======== ========
a. On December 29, 2004, we entered into a credit facility to be used (i) to
repay in full our then outstanding senior indebtedness, comprised of a
short-term credit facility and a prior revolving credit facility; (ii) for
working capital and general corporate purposes; and (iii) to pay certain fees
and expenses incurred in connection with such transactions. Pursuant to our
credit facility, the lenders severally agreed to provide us the following: (a) a
senior secured term loan facility in an aggregate principal amount of $100,000
and (b) a senior secured revolving credit facility in an aggregate principal
amount of up to $150,000 with a $20,000 sublimit available for letters of
credit. Our credit facility is secured on a first priority basis by (i) a pledge
of all of the capital stock or other equity interests of our domestic
subsidiaries, (ii) a pledge of 65% of the capital stock or other equity
interests of selected overseas subsidiaries located in the United Kingdom, the
Netherlands and Japan, (iii) 100% of the capital stock of the manufacturing
entity in Reynosa, Mexico and all of its other assets and (iv) all our other
domestic assets (other than real estate) and the stock of our domestic
subsidiaries.
On December 29, 2004, we borrowed $100,000 under the term loan facility and
$100,000 under the revolving credit facility. The term loan facility is payable
at $11,111 per quarter, which commences on December 15, 2005 through the term
loan maturity date of December 30, 2007. The revolving credit facility matures
on December 30, 2009. On February 3, 2005, we paid $50,000 of the outstanding
balance under the revolving credit facility. The interest rate on the credit
facility is the greater of (i) the prime rate and (ii) the federal funds rate
plus 0.5%, plus, in both cases, the applicable margin for U.S.-based loans. For
Eurodollar-based loans, the rate is the adjusted LIBO rate (defined as the LIBO
rate multiplied by the statutory reserve rate) plus the applicable margin. The
applicable margin is based upon our leverage ratio (defined as the ratio of our
total indebtedness to our consolidated EBITDA for the period of the most recent
four fiscal quarters) plus 0.25% to 1% for U.S.-based loans and 1.25% to 2% for
Eurodollar-based loans. The interest rates on our outstanding borrowings at
March 31, 2005 for the $100,000 term loan facility was 4.50% for $50,000 and
4.41% for $50,000. The interest rate on the $50,000 revolving credit facility as
of March 31, 2005 was 4.47%
Under our credit facility, there are a number of security and financial
covenant provisions. Our new credit facility contains customary negative
covenants and restrictions on our ability to engage in specified activities,
including, but not limited to:
- limitations on indebtedness, except, among others, permitted
subordinated debt and unsecured debt not to exceed $30,000 at any time,
indebtedness to finance capital expenditures not to exceed $20,000 at
any time;
- restrictions on liens, mergers and acquisitions, transactions with
affiliates and guarantees;
- limitations on investments, except, among others, permitted investments,
investments by the company and its subsidiaries in equity interests in
their subsidiaries not to exceed $25,000 at any time, intercompany loans
not to exceed $25,000 at any time, permitted acquisitions not to exceed
$50,000 at any time, and other investments not to exceed $15,000 in the
aggregate;
31
- limitations on sales of assets, among others, to persons other than
affiliates not to exceed $25,000 at any time, and sales or transfers of
lease contracts under the Bank of Tokyo securitization not to exceed
$15,000 in any fiscal year;
- limitations on sale and leaseback transactions not to exceed $20,000 at
any time; and
- restrictions on payments of dividends in an amount not to exceed $8,000
in any year including limitations on repurchases of common stock under
employee stock purchase plans in an amount not to exceed $5,000 in any
year plus the amount received from employees during such year in payment
of the purchase price of shares acquired by them under such stock
purchase plan.
Our credit facility contains customary affirmative covenants that require us
to perform certain activities, including, but not limited to:
- furnish the administrative agent and each lender with certain periodic
financial reports;
- furnish the administrative agent and each lender notice of certain
events, including, but not limited to, the occurrence of any default or
any other occurrence that could reasonably be expected to result in an
material adverse effect;
- furnish the administrative agent with notice regarding any changes to
the collateral; and
- pay taxes and other material obligations, maintain insurance and keep
proper books and records.
Under provisions of our credit facility, at our option, we may seek to
obtain investment grade ratings from Moody's Investors Service, Inc. and
Standard & Poor's Ratings Group, Inc. If these ratings are obtained, all
collateral securing the new credit facility will be released.
Our credit facility contains financial covenants that (a) restrict our total
leverage ratio (debt to adjusted EBITDA) to a ratio no greater than 2.5 times
total debt at any time, (b) require that we maintain the maximum senior leverage
ratio to 2.0 to 1.0 (after January 1, 2006, maximum senior leverage is 1.75x at
any time total leverage exceeds 2.0x), (c) require that we maintain minimum
fixed charge coverage ratio of 1.5x and (d) minimum unrestricted domestic cash
requirement of $25,000 at all times prior to September 30, 2005 and $50,000 at
all times thereafter. As of March 31, 2005 we are in compliance with the
covenants under the new credit facility.
b. On March 31, 2004, we entered into a purchase money secured installment
loan with a bank for $13,825. The loan is payable in four semiannual
installments of $3,655, including interest which commenced October 1, 2004. The
proceeds received under the loan were used to finance the purchases of certain
software.
c. In January 2001, we entered into a private Mandatorily Exchangeable
Securities Contract for Shared Appreciation Income Linked Securities ("SAILS")
with a highly rated financial institution. The securities that underlie the
SAILS contract represent our investment in Cisco common stock, which was
acquired in connection with the Telxon acquisition. The 4,160 shares of Cisco
common stock had a market value of $74,547 at March 31, 2005 and $80,288 at
December 31, 2004. Such shares are held as collateral to secure the debt
instrument associated with the SAILS and are included in Investments in
Marketable Securities in the condensed consolidated balance sheets. This debt
has a seven-year maturity and we pay interest at a cash coupon rate of 3.625%.
In January 2008, the SAILS debt will be exchangeable for shares of Cisco
common stock or, at our option, cash in lieu of shares. Net proceeds from the
issuance of the SAILS and termination of an existing freestanding collar
arrangement were approximately $262,246, which were used for general corporate
purposes, including the repayment of debt under the then outstanding revolving
credit facility. The SAILS contain an embedded equity collar, which effectively
hedges the exposure to fluctuations in the fair value of our holdings in Cisco
common stock. We account for the embedded equity collar as a derivative
financial instrument in accordance with the requirements of SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The gain or loss
on changes in the fair value of the derivative is recognized through earnings in
the period of change together with a substantial offsetting gain or loss on the
Cisco shares.
The derivative has been combined with the debt instrument in long-term debt
in the condensed consolidated balance sheets and presented on a net basis as
permitted under FASB Interpretation No. 39, "Offsetting of Amounts Related to
Certain Contracts," as there exists a legal right of offset. The SAILS
liability, net of the derivative asset, represents $81,463 at March 31, 2005.
32
d. Other long-term debt of $60 and $63 at March 31, 2005 and December 31,
2004, respectively, represent capital lease obligations and various other loans
maturing through 2007.
CONTRACTUAL CASH OBLIGATIONS
As of March 31, 2005, there have not been any material changes in Symbol's
contractual obligations as presented in its Annual Report on Form 10-K for the
year ended December 31, 2004.
Currently, our primary source of liquidity is cash flow from operations and
the secured credit line. Our primary liquidity requirements continue to be
working capital, engineering costs, and financing and investing activities.
Our ability to fund planned capital expenditures and to make payments on and
to refinance our indebtedness will depend on our ability to generate cash in the
future. This, to a certain extent, is subject to general economic, financial,
competitive, legislative, regulatory and other factors that are beyond our
control. Based on our current level of operations, we believe our cash flow from
operations, available cash and available borrowings under our secured credit
line will be adequate to meet our future liquidity needs for the next twelve
months.
The Company may also be required to make future cash outlays in connection
with outstanding legal contingencies. These potential cash outlays could be
material and might affect liquidity requirements and cause the Company to pursue
additional financing. We cannot assure you, however, that our business will
generate sufficient cash flow from operations or that future borrowings will be
available to us under our secured credit line in an amount sufficient to enable
us to fund our other liquidity needs or pay our indebtedness.
CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS
The preparation of financial statements and related disclosures in
conformity with accounting principles generally accepted in the United States of
America requires us to make judgments, assumptions and estimates that affect the
reported amounts of assets, liabilities, revenue and expenses, as well as the
disclosure of contingent assets and liabilities.
On an on-going basis, we evaluate our estimates and judgments, including
those related to product return reserves, allowance for doubtful accounts, legal
contingencies, inventory valuation, warranty reserves, useful lives of
long-lived assets, goodwill, derivative instrument valuations and income taxes.
We base our estimates and judgments on historical experience and on various
other factors that we believe to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.
Note 1 of the Notes to the Consolidated Financial Statements "Summary of
Significant Accounting Policies" summarizes each of our significant accounting
policies in our Annual Report on Form 10-K. We believe the following critical
accounting policies affect the more significant judgments and estimates used in
the preparation of our Consolidated Financial Statements:
Product return reserves and allowance for doubtful accounts
We record as reductions of revenue provisions for estimated product returns.
The estimated amount is based on historical experience of similar products sold
to our customers and then returned. If our product mix or customer base changes
significantly, this could result in a change to our future estimated product
return reserve. Management believes the reserve for product returns is adequate
to cover anticipated credits issued for such returns; however, if future returns
differ from our historical experience and estimates, then this could result in
an increase in the reserve. An increase of one percent in the reserve percentage
would result in an increase in our estimated product return reserve of
approximately $1,500 as of March 31, 2005.
We record accounts receivable, net of an allowance for doubtful accounts.
Throughout the year, we estimate our ability to collect outstanding receivables
and establish an allowance for doubtful accounts. In doing so, we evaluate the
age of our receivables, past collection history, current financial conditions
for key customers, and economic conditions. Based on this evaluation, we
establish a reserve for specific accounts receivable that we believe are
uncollectible. A deterioration in the financial condition of any key customer or
a significant slowing in the economy could have a material negative impact on
our ability to collect a portion or all of the
33
accounts receivable. We believe that analysis of historical trends and current
knowledge of potential collection problems provides us significant information
to establish a reasonable estimate for an allowance for doubtful accounts.
However, since we cannot predict with certainty future changes in the financial
stability of our customers, our actual future losses from uncollectible accounts
may differ from our estimates, which could have an adverse effect on our
financial condition and results of operations.
Legal contingencies
We are currently involved in certain legal proceedings and accruals are
established when we are able to estimate the probable outcome of these matters
in accordance with Statements of Financial Accounting Standards No. 5
"Accounting for Contingencies." Such estimates of outcome are derived from
consultation with in-house and outside legal counsel, as well as an assessment
of litigation and settlement strategies. In many cases, outcomes of such matters
are determined by third parties, including governmental entities and judicial
bodies. Any provisions made in our financial statements, as well as related
disclosures, represent management's best estimates of the current status of such
matters and its potential outcome based on a review of the facts and in
consultation with in-house and outside legal counsel. Our estimates may change
from period to period based on changes in facts and circumstances, process of
negotiations in settling matters and other changes determined by management. As
further described under the caption "Item 3. Legal Proceedings," in our Annual
Report on Form 10-K for the year ended December 31, 2004, we are in litigation
with SmartMedia of Delaware, Inc. Currently, we do not have a liability recorded
on our balance sheet related to this matter as we believe an unfavorable outcome
is not probable. However, should circumstances change due to new developments
related to this matter changes in our estimates may need to be made and recorded
amounts and costs could be material.
Inventory valuation
We record our inventories at the lower of historical cost or market value.
In assessing the ultimate realization of recorded amounts, we are required to
make judgments as to future demand requirements and compare these with the
current or committed inventory levels. Projected demand levels, economic
conditions, business restructurings, technological innovation and product life
cycles are variables we assess when determining our reserve for excess and
obsolete inventories. We have experienced significant changes in required
reserves in recent periods due to these variables. At the end of 2003, our
inventory reserves were estimated at $109,331 or 33.9% of gross inventory
respectively. As of March 31, 2005 such reserves have been reduced to $57,974 or
25.2% of gross inventory. The reduction of reserves was the result of the write
off and scrapping of inventory, the sale of inventory and an improvement in our
management of inventory turns.
In addition, should future demand requirements change after a reserve has
been established, there is the possibility that we could have future sales of
product that has been previously reserved. While we continue to believe that our
recorded reserves and policy for determining the reserve requirement are
appropriate, it is possible that significant changes in required inventory
reserves may continue to occur in the future if there is a deterioration in
market conditions or acceleration in technological change and we may experience
future sales of product for which reserves had previously been established.
Warranty reserves
We provide standard warranty coverage for most of our products for a period
of one year from the date of shipment. We record a liability for estimated
warranty claims based on historical claims, product failure rates and other
factors. This liability primarily includes the anticipated cost of materials,
labor and shipping necessary to repair and service the equipment. Our warranty
obligation is affected by the products actually under warranty, product failure
rates, material usage rates, and the efficiency by which the product failure is
corrected. Should our warranty policy change or should actual failure rates,
material usage and labor efficiencies differ from our estimates, revisions to
the estimated warranty liability would be required. A five percent increase in
our products under warranty would cause an approximate $833 increase to our
warranty provision at March 31, 2005.
Useful lives of long-lived assets
We estimate the useful lives of our long-lived assets, including property,
plant and equipment, identifiable finite life intangible assets and software
development costs for internal use in order to determine the amount of
depreciation and amortization expense to be recorded during any reporting
period. The estimated lives are based on historical experience with similar
assets as well as taking into consideration anticipated technological or other
changes. If technological changes were to occur more rapidly or slowly than
anticipated, or in a different form, useful lives may need to be changed
accordingly, resulting in either an increase or decrease in depreciation and
amortization expense. We review these assets annually or whenever events or
changes in circumstances indicate the carrying value may not be recoverable.
Factors we consider important and that could trigger an impairment review
include significant
34
changes in the manner of our use of the acquired asset, technological advances,
changes in historical or projected operating performance and cash flows and
significant negative economic trends.
Goodwill impairments
Our methodology for allocating the purchase price relating to purchase
acquisitions is determined through established valuation techniques in the
high-technology mobile computing industry. Goodwill is measured as the excess of
the cost of acquisition over the sum of the fair values of the tangible and
identifiable intangible assets acquired less liabilities assumed. We test on an
annual basis or more frequently if an event occurs or circumstances change that
indicate a potential impairment may exist to its carrying value. In response to
changes in industry and market conditions, we could be required to strategically
realign our resources and consider restructuring, disposing of, or otherwise
exiting businesses, which could result in an impairment of goodwill.
Derivative instruments, hedging activities and foreign currency
We utilize derivative financial instruments to hedge foreign exchange rate
risk exposures related to foreign currency denominated payments from our
international subsidiaries. We also utilize a derivative financial instrument to
hedge fluctuations in the fair value of our investment in Cisco common shares.
Our foreign exchange derivatives qualify for hedge accounting in accordance with
the provisions of SFAS No. 133. We do not participate in speculative derivatives
trading. While we intend to continue to meet the conditions for hedge
accounting, if such hedges did not qualify as highly effective, or if we did not
believe the forecasted transactions would occur, the changes in fair value of
the derivatives used as hedges would be reflected in earnings and could be
material.
Income Taxes
Assessment of the appropriate amount and classification of income taxes are
dependent on several factors, including estimates of the timing and probability
of the realization of deferred income taxes and the timing of tax payments.
Deferred income taxes are provided for the effect of temporary differences
between the amounts of assets and liabilities recognized for financial reporting
purposes and the amounts recognized for income tax purposes. We measure deferred
tax assets and liabilities using enacted tax rates, that if changed, would
result in either an increase or decrease in the reported income taxes in the
period of change. A valuation allowance is recorded when it is more likely than
not that a deferred tax asset will not be realized. In assessing the likelihood
of realization, management considers estimates of future taxable income, the
character of income needed to realize future tax benefits, and other available
evidence.
Our assessment of future taxable income is based on historical results,
exclusive of non-recurring or unusual charges and management's assessment of
future taxable income and other known transactions which would result in taxable
income.
Three forecasts of future sources of taxable income were prepared based on
various assumptions concerning the growth of the Company's business operations
that are subject to income tax in the United States. The reversal of all
significant timing differences was considered in calculating the forecasted
taxable income under each scenario. The estimated income tax payable was then
calculated based on the tax rates in effect as of March 31, 2005. Tax credits
(including a forecast of expected tax credits that will arise in each year of
the forecast) were then applied to reduce the tax, subject to existing
limitations under the applicable tax laws. Based on these forecasts,
substantially all of the deferred tax assets would be utilized well before the
underlying tax attributes' expiration periods.
We have had a number of isolated items in the past that have had a negative
and positive impact on our taxable income, however, we do not expect these items
to recur in the future. We are projecting taxable income in the future.
Actual income taxes could vary from estimated amounts due to future impacts
of various items, including changes in tax laws, positions taken by governmental
authorities relative to the deductibility of certain expenses we incur, changes
in our financial condition and results of operations, as well as final review of
our tax returns by various taxing authorities that are under audit in the normal
course of business.
Our critical accounting policies have been reviewed with the Audit Committee
of the Board of Directors.
Recently Issued Accounting Pronouncements
35
On December 16, 2004, the Financial Accounting Standards Board (FASB) issued
FASB Statement No. 123 (revised 2004), Share-Based Payment ("Statement 123(R)"),
which is a revision of FASB Statement No. 123, Accounting for Stock-Based
Compensation. Statement 123(R) supersedes APB Opinion No. 25, Accounting for
Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash
Flows. Generally, the approach in Statement 123(R) is similar to the approach
described in Statement 123. However, Statement 123(R) requires all share-based
payments to employees, including grants of employee stock options, to be
recognized in the income statement based on their fair values.
In April 2005, the SEC extended the adoption date for Statement 123(R) until
January 1, 2006. Early adoption will be permitted in periods in which financial
statements have not yet been issued. We expect to adopt Statement 123(R), based
upon the extended adoption date, on January 1, 2006 using the modified
prospective method.
As permitted by Statement 123, we currently account for share-based payments
to employees using APB Opinion 25's intrinsic value method and, as such,
generally recognize no compensation cost for employee stock options.
Accordingly, the adoption of Statement 123(R)'s fair value method will have a
significant impact on our results of operations. The impact of adoption of
Statement 123(R) cannot be predicted at this time because it will depend on
levels of share-based payments granted in the future and assumptions used in
such periods to calculate the fair value of such grants. However, had we adopted
Statement 123(R) in prior periods, the impact of that standard would have
approximated the impact of Statement 123 as described in the disclosure of pro
forma net income and earnings per share shown in Stock-Based Compensation in the
footnotes to the accompanying condensed consolidated financial statements.
Statement 123(R) also requires the benefits of tax deductions in excess of
recognized compensation cost to be reported as a financing cash flow, rather
than as an operating cash flow as required under current literature. This
requirement will reduce net operating cash flows and increase net financing cash
flows in periods after adoption. While we cannot estimate what those amounts
will be in the future (because they depend on, among other things, when
employees exercise stock options), the amount of operating cash flows recognized
for such tax deductions were $1,947 and $0 for the three-months ended March 31,
2005 and 2004, respectively.
Based on the release of Statement 123(R), we plan on amending our Employee
Stock Purchase Program ("ESPP") to reduce the discount of the price of the
shares purchased by employees in the ESPP from its current discount of 15% to a
discount of 5% and we will also eliminate the look-back period currently
utilized to determine the price of the shares purchased. These changes will
allow the ESPP to continue to be non compensatory, which will result in no
compensation expense to be recorded by us in our statement of income when we
implement Statement 123(R) with respect to such plan.
ACCESS TO INFORMATION
Symbol's Internet address is www.symbol.com. Through the Investor Relations
section of our Internet website, we make available, free of charge, our Annual
Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K
and any amendments to those reports filed or furnished pursuant to Section 13(a)
or 15(d) of the Securities and Exchange Act of 1934 (the "Exchange Act"), as
well as any filings made pursuant to Section 16 of the Exchange Act, as soon as
reasonably practicable after we electronically file such material with, or
furnish it to, the Commission. Copies are also available, without charge, from
Symbol Investor Relations, One Symbol Plaza, Holtsville, New York 11742. Our
Internet website and the information contained therein or incorporated therein
are not incorporated into this Quarterly Report on Form 10-Q.
You may also read and copy materials that we have filed with the Commission
at the Commission's public reference room located at 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549. Please call the Commission at 1-800-SEC-0330
for further information on the public reference room. In addition, our filings
with the Commission are available to the public on the Commission's web site at
www.sec.gov.
36
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes regarding Symbol's market risk position
from the information provided under Item 7A of Symbol's Annual Report on Form
10-K for the year ended December 31, 2004.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. We maintain disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) that are designed to ensure that information required to be disclosed
in our Exchange Act reports is recorded, processed, summarized and reported
within the time periods specified in the SEC's rules and forms, and that such
information is accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosure. We conducted an evaluation,
under the supervision and with the participation of management, including our
Chief Executive Officer and Chief Financial Officer, of the effectiveness of our
disclosure controls and procedures as of the end of the period covered by this
report. Based on this evaluation, our Chief Executive Officer and our Chief
Financial Officer have concluded that, as of March 31, 2005, our disclosure
controls and procedures were effective.
Changes in Internal Control Over Financial Reporting. There was no change
in our internal control over financial reporting that occurred during the
quarter ended March 31, 2005 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information set forth in Note 9 in the Condensed Consolidated Financial
Statements included in this Quarterly Report on Form 10-Q is hereby incorporated
by reference.
ITEM 6. EXHIBITS
(a) The following exhibits are included herein:
31.1 Certification of Chief Executive Officer, pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer, pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
37
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SYMBOL TECHNOLOGIES, INC.
Dated: May 6, 2005 By: /s/ William R. Nuti
----------------------------------
William R. Nuti
Chief Executive Officer, President
and Director
(principal executive officer)
Dated: May 6, 2005 By: /s/ Mark T. Greenquist
----------------------------------
Mark T. Greenquist
Senior Vice President
and Chief Financial Officer
(principal financial officer)
Dated: May 6, 2005 By: /s/ James M. Conboy
----------------------------------
James M. Conboy
Vice President - Controller
and Chief Accounting Officer
(principal accounting officer)
38